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  • AUD/JPY losing significant milage on the day post a bearish Fed.
  • Markets rattled by the Fed’s bearishness and risk-FX responds in kind.

At the time of writing, AUD/JPY is trading at 73.25 within a 73.23 and 75.00 range losing over 25 on the day on a risk-off market. 

Volatility has spiked following the Federal Reserve with the VIX printing higher and breaking out of a bearish/sideways trend for the month so far. 

The stock market has wobbled from its glorious heights and weak hands are abandoning ship, expecting its northerly trajectory to be seriously jeopardised under so much uncertainty. 

Powell’s bearish reflection on the current situation and pessimistic outlook where he described a bleak future for the US economic landscape where many millions of jobs may never come back has taken its toll on a fragile market, forcing out the weaker hands.

In Asia, following a post-Powell presser slump, S&P 500 futures pointed to a down day for the open today: S&P 500: Futures heading to test a critical daily candle, if it breaks, a 61.8% retracement will be earmarked, and much more

Here is the current picture on Wall Street at the time of writing, weighing on correlated risk-FX, including the Aussie predominately while benefitting the safe havens, such as the yen and US dollar:

  • DOW 25403.74 -5.88%.
  • SPX 3025.42 -5.16%.
  • NDX 9666.09 -4.24%.
  • RTY 1368.94 -6.71%.
  • VIX 38.07 +38.08%.

AUD/USD to be two-way traffic from here

A number of factors have gone into the Aussie’s incredible rally, namely iron ore above $100 (watch that now as it nears support as the rally stalls) and subsequent current account surpluses as one factor.

There is no doubt that the Reserve Bank of Australia has been the least dovish of the G10 central banks.

 When coupled with a near enough clean bill of health with respect to COVID-19, we can sympathise with the strength of the currency which rallied to the highest levels since July 2019 vs the greenback. 

On the other hand, however, there has been a very disjointed ecosystem in financial markets with ad-hoc flows and little investment capital present which could help to explain how the rally, while initially justified, managed to continue for so long uninterrupted by supply. 

As analysts at Westpac explained, AUD/USD enjoyed an 8-day winning streak through Monday and a not coincidental push higher in key equity indexes. 

The subsequent pullback though suggests to the analysts that price action will at least become more two-way, with interest to sell above 0.70 likely to be ongoing.

A meltdown in global stocks would, of course, hit the Aussie, but with G10 central banks overall very much inbalance sheet expansion mode while the RBA just holds the line, AUD probably has enough fuel for further trade above 0.70 in the week ahead. 

AUD/JPY levels

 

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