AUD/JPY price analysis breaks the bullish flag formation to the upside

AUD/JPY price analysis for Australian dollar and Japanese yen breaks the bullish flag formation to the upside. The target level is located at 72.20. We look for dips to be bought

Market highlights from the past week

Thursday April 2: US equities failed to hold their best levels and closed lower

Friday April 3: US jobless claims increased sharply to a fresh record high over 6.5m, reinforcing fears of a deep economic contraction

Monday April 6: Risk appetite strengthened on Monday amid hope that the increase in global coronavirus cases in was close to peaking

Tuesday April 7: Risk appetite remained firm for most of Tuesday, but generally disappointing coronavirus data triggered a more cautious tone later in the day

Wednesday 8th April: FOMC Minutes

The week ahead

Thursday April 9: US Initial Jobless Claims

Friday: Good Friday

Monday: Bank Holiday

AUD/JPY price analysis

Although not one of the most popular of currencies crosses, 0'>AUD/JPY is a good bellwether for stocks and tends to move in unison. In the past, this has been known as “the carry trade”. Traders would look for a high yielding currency against a low yielding currency and would be paid a premium. This premium was then invested in stocks. When stocks do down, AUD/JPY goes down as the carry trade is unwound.

In the early 1990s the Australian interest rates were 16-17 per cent. At that time the Japanese interest rates were between 5 and 6% per cent.

Traders would look to buy the high yielding currency offering interest at 16 per cent and sell the low yielding currency paying 5 per cent.

Although the currency differential is much less today, with Australia set at + 0.25 and the Japan at -0.1 per cent, the correlation still stands.

Most global Indices have made a swing low or a bottom on the March 19. AUD/JPY made a low of March 19.

Looking at the charts below we can see the correlation between 0'>AUD/JPY and the 0'>S&P500

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SP500 Daily:

AUD/JPY Daily:

Let us look at 0'>AUD/JPY from a technical analysis perspective.

4-hour (intraday): Going to the intraday chart first. We have broken out of a channel formation to the upside. This could be regarded as a flag formation and is bullish for price action. To calculate the target level, we take the length of the flagpole (0-A) and project that from the next swing low (B-C). This makes a target level of 72.20

We can also note that we have tested the reverse channel support with buyers coming back in to the market.

Daily: If we now look at the daily chart, 72.20 is very close to a Fibonacci confluence zone of 72.55-72.97 (161.8 per cent extension and a 78.6 per cent pullback). These zones often act as solid resistance areas and are where traders may look to reverse or close out positions.

Outlook: Short term bullish to 72.20 on a measured move from the flag breakout

Possible trade setup:

Action: Buying dips close to 66.80

Stop: 65.80 back inside the flag

Targets: 72.20 measured move target and possibly 72.90 161.8 per cent extension

Potential return on risk to first target: R 5.4 (reward 540/ risk 100)

Australian Dollar / Japanese Yen
Daily change
91.63
Low: 91.184
High: 92.161

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