Kris Sayce (KS): Gabriel, we haven’t had a chat in a while due to your work on Swarm Trading, but can you give our readers a rundown on the relationship between the Aussie Dollar and the Japanese Yen?
Gabriel Andre (GA): Of course, the AUD/JPY currency pair has been a risk appetite indicator since the summer of 2006. This previous popular carry trade is strongly with the Australian stock indices (ASX 200), as the Japanese currency is globally negatively with world equity indices.
KS: OK, that would make sense. If investors are borrowing the Yen at low interest rates and then selling it to buy overseas assets that’s bound to put some pressure on it. Anyway, carry on.
GA: You see, when investors were risk-seekers, they went long carry trades (buying Aussie dollar, selling Japanese Yen for example) where they could win on both the interest rate differential and FX rates. Those gains in cash were invested on the stock markets. When the financial and economic climates turned bad, investors became risk-averse and cut their carry trade positions. They also had to sell their equity lines to have some cash to face potential losses on the currency side.
KS: And of course that just creates a downward spiral as sellers keep selling in order to meet margin calls, which creates more selling pressure. So, can you show us that on a chart?
GA: Yes, you see here, the AUD/JPY is plot in black bar charts whereas the ASX 200 is represented by the red line…
Click to enlarge
Since last October, the correlation is almost perfect between the Australian equity index and the currency pair. Both are currently moving on low levels and consolidate after several strong bearish months last year.
The currency pair fell from a high of 104.48 (point A on the chart) posted on last July 23 to a low of 55.11 (point B) on October 24, which is a decline of 47.25% in just 3 months. It immediately jumped back to 70.50 in early November and to 68.25 in early January (points C and D).
The price action fell back to post a low at 55.51 in early February (point E) and immediately bounced back.
KS: Would you say there are any definite support areas, and if so at what level?
GA: Yes, the range between 55 and 55.50 is a nice support area where there is some solid buying interest. Plus, points B and E are building a “double bottom” chart pattern: that is typically a bullish sign. The double bottom is a reversal pattern of a downward trend in the process of becoming an uptrend.
The MACD confirms the bullish signal when AUD/JPY rebounded in early February: it crossed above its signal line and is about to reach the zero line. A breakout above it would strengthen the upside momentum. The Stochastic Momentum Index is also bullish on the very short-term (5 days).
KS: So, Gabriel, can you stick your neck and give us an idea of which direction the Aussie/Yen trade should go?
GA: All the indicators are telling me that the currency pair may rise until the previous peak level (point D), therefore around 68. However the main target now on the medium-term is 74, which is the 38.2% retracement ratio of the bearish trend occurred between points A and B.
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