After recording a low of 85.17 on February 7th, the AUDJPY pair made a sharp bullish reversal to hit 87.12 on Friday. The main reason for the Aussie to strengthen was the increase in the price of iron ore to the October 2014 high of $83.84 per ton. Notably, iron ore is the top export revenue earner of Australia. The recent upbeat assessment of Australia’s economy by the RBA also aided the uptrend. While the medium-term trend is certainly on the upside, in the short-term, we can expect a correction in the AUDJPY pair due to the reasons mentioned underneath.
David Pleming, metal and mining strategist at HSBC, stated that the price of iron ore would fall gradually in the days ahead due to poor demand growth in 2017 and 2018. Another interesting point to note is that the restocking process at Chinese ports has slowed down considerably in recent weeks due to a sharp rise in the price. Ultimately, the slowdown in demand is expected to pull down the price of iron ore.
Earlier last week, the Australian Bureau of Statistics stated that the Australian retail sales declined 0.1% m-o-m in December, against analysts’ expectation of a 0.1% growth. In November, the retail sales increased by a downwardly revised 0.1%. According to another report published by the Bureau last Friday, the number of new home loans increased only 0.4% m-o-m in December, compared with an upwardly revised 1.3% m-o-m growth in the previous month. The reported home loan date was below the 1% growth anticipated by analysts.
The upcoming French and Dutch elections have considerably increased global political uncertainty. Investors are concerned about the rise of nationalism in the member states of the EU. This has once again increased the demand for safe-haven currencies such as the Yen. Economists also argue that Trump’s remark about the Yen being undervalued has some merit. Thus, based on the economic data and the political developments in Europe, we expect the AUDJPY pair to begin its downtrend.
The AUDJPY pair has bounced off a strong monthly support level of 85.50. The next major resistance exists at 87.20. The stochastic oscillator’s reading of over 90 underlines the probability of a technical correction. So, it would be prudent to stay short in the counter.
A Forex trader can go short in the AUDJPY pair near 87.50, with a stop-loss order above 88.40. The short position can be closed at 85.60.
Likewise, a binary trader can purchase a low or below contract to establish an equivalent of a short position. While entering the trade near 87.40 levels, a seven day (excluding weekend) validity period should be chosen for the contract.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
