AUD/JPY: Bearish case getting cheaper as each session passes

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AUD/JPY has been on the bid at the start of this week and despite ongoing geopolitical tensions that have weighed on commodity markets. There has been reduced liquidity in the markets owing to UK and US public holidays which has been accentuating the moves in the commodity sector.

Positive vibes supporting AUD

However, liquidity and the positive vibes surrounding the easing of lockdowns around the world have been key drivers of late and helping to buoy the antipodeans which have a positive correlation with the performances of global equities.

There is growing confidence pertaining to the easing of lockdown measures, although that is telling just half of the story. There is still an underbelly of risk aversion out there and both the bond and gold markets are showing it.

At current levels a global recovery is in the price, and we believe it’s a question of when, not if, depreciation resumes. Interest rate differentials have also played a role in driving the AUD and NZD lately, but we don’t think this will last,

– analysts at ANZ Bank argued, adding:

Returns on unhedged bond investments will be highly dependent on volatility, given the small amount of carry still available in the G10. In our view, this means that both currencies will become more sensitive to the global growth cycle, which remains the primary driver of the volatility cycle.

The obvious risks are with the prospects of a second wave of COVID-19 as social distancing measures are relaxed. Additionally, a key driver for 2018's 3000 pip drop was to do with the US/Sino trade war, a war which is far from over and turning from cold to hot in the opinions of some observers. 

Watch this HK space

Hong Kong's protests to the recent call by China and plans to impose sweeping anti sedition legislation is a live risk for financial markets which we are monitoring very closely this week. 

At a meeting of mainland China’s National People’s Congress last week, authorities said they would go around Hong Kong’s own legislature and draft measures against secession, foreign influence and terrorism, much to the displeasure of the US administration.

This could create economic and political risks for US multinational firms with operations in Hong Kong, so Trump now faces a tough choice between securing a trade deal with China and heeding lawmakers’ calls to defend democratic freedoms. 

AUD/JPY levels

Chart of The Week: AUD/JPY in a precarious position at daily support