AUD/JPY continues to face selling pressure at 112.55 in the early European session on Friday amid a stronger yen versus the Aussie currency pair. This is attributed to the rising probability of Japanese officials intervening in the forex market once again to restrict the excessive decline of the JPY. Also contributing to a weaker AUD/JPY is the probability of an interest rate hike by the Bank of Japan, which has become a strong fundamental driver for investors to buy JPY.
AUD/JPY Outlook: Japanese Intervention Risks Increase There has been increased market focus on the likelihood of new Japanese interventions in the foreign exchange markets following statements made by Mr. Mitsuhiro Furusawa, a former Japanese senior currency diplomat, who expressed concern that Japan might choose to coordinate its activities with the U.S. at any moment. He further noted that the policymakers must communicate the likelihood of interest rate rises earlier than expected in order to help bring stability into the yen. This has created increased caution among the market participants since the risk of official interventions reduces the likelihood of trading against JPY.
Bank of Japan Rate Hike Expectations Support the Japanese Yen Expectations regarding monetary policy are also being rethought, favoring the yen in this situation. As per information from Tokyo Tanshi, markets currently give a 76% chance of an increase in interest rates by the Bank of Japan in the month of September, compared to a 24% chance on July 30th. This drastic change indicates a growing view among the policymakers in Japan who may choose to take a more aggressive stand toward tight monetary policy conditions, which could have been otherwise thought unlikely earlier.
Japan-US FX Intervention Helps Correct Yen Undervaluation In addition, the larger trend for the currency is also looking less attractive for Yen bears. DBS Group Research explained that the undervalued status of the Japanese yen had been gradually decreasing due to recent government interventions into the foreign exchange market. “The second yen intervention by the Japanese government in the current year was made with U.S. cooperation in order to show how serious policymakers were about stopping currency devaluation. Such an intervention could lead to changes not only on the trading level because traders would be afraid of holding long shorts during periods of intervention.”
AUD/JPY Technical Analysis Shows Bearish Pressure Technically, the AUD/JPY pair continues to be contained below both the Bollinger Band middle line and the 100-period simple moving average, making its technical bias negative. Its Relative Strength Index currently stands at around 50.43, showing no signs of an oversold market condition. It implies that further moves towards lower price levels are possible in case selling pressure keeps rising until the support level gives way, while buyers will need to see a convincing break higher in order to gain some control.
Key AUD/JPY Resistance and Support Levels Short-term resistance comes in at 112.70, after which we see the 100-day moving average coming in at 112.90. Breaking to the upside in daily closes above the two marks will reduce the bearish setup and might create a path towards the high on July 27, coming in at 114.67. Once above, the top end of the Bollinger Bands at 115.40 is the target for the upside move. The first target for the downside is represented by the August 10 low at 111.63. A breakout below that will open up the 110.00 region.
AUD/JPY Forecast: Sellers Retain the Advantage Below 112.90 Outlook on AUD/JPY remains bearish so long as price remains below the 100 SMA and resistance around 112.90 levels. The hawkish bias on BOJ rate hikes and the possibility of further intervention, along with the realization of an undervaluation correction of JPY, will create tough fundamental conditions for the pair. A break below 111.63 levels will strengthen the bears' position, making it more possible to reach levels around 110.00. In turn, a breakout above 112.90 levels will weaken the sellers' position, and the focus will be placed on 114.67 and 115.40 levels.
