Since the resurgence of the credit crisis a few months ago, both stocks and commodities prices have been plunging. But the FX market is probably the most impacted as the volatility has soared dramatically to produce unprecedented sharp moves on several currency pairs of the G10 universe.
In our last update on the AUD/JPY on September 30, the pair was still trading around 83.50. Less than one month later, it is now trading around 57.25 therefore 31% lower.
A weekly chart is better to observe this massive plunge of the AUD/JPY which had been one of the best performer during those precedent years, driven by the carry trades operated by fund managers and investors (borrow-short- the Japanese Yen and lend-long- the Australian Dollar to take advantage of the interest rate differential).
The big picture is quite simple now: the AUD/JPY has totally retraced a more than 7-year bullish trend in just 3 months!!
On July 25 this year, the high posted was 104.48. Last week, it posted a low at 55.11 (point E), which is the level of the original point of the rally generated 8 years ago in October 2000 (point A).
The level of 55 is the immediate support as it is actually an historical low rate, the lowest at least since 1991.
The technical indicators have all reached extreme low levels and remain bearish. As explained recently in a previous update, the JPY has been considered as a risk appetite indicator and therefore a further plunge on the equity markets will benefit to the Japanese currency.
There is a new technical target for the S&P/ASX 200 at 3,500 points. Consequently a new test of the level of 55 on the AUD/JPY pair is likely. The correlation of indices and Yen pairs is strong and the objectives of 3,500 points on the ASX and of 55 on the AUD/JPY may be reached with a similar timing soon. It would argue for a technical pause and for a rebound as they would be in deeply oversold areas on both on long-term support levels.
In this scenario a correction of the recent 3-month dive on the AUD/JPY is expected on the coming weeks. The first significant Fibonacci retracement ratio is set at 67. It will be the first target.
On the downside, a further plunge would drive the AUD/JPY into unknown territory therefore there are no targets or supports that could act as references for traders.
Good Investing,
Gabriel
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