UD/JPY’s recovery in July was an important monthly reversal but remains far below the crucial 88 level, which is the 61.8% retracement of the decline from the October 2007 high to the October 2008 low. As price moves along the time axis, the 88 level also coincides with the trend line resistance, extending from the same October 2007 through the July 2008 high. Thus, any subsequent recovery above 81.40 — a 50% retracement of the aforementioned decline — will likely face significant pressure at 88 (see "Stuck in the middle").
Integrating oscillators into the chart, we use the slow stochastics (9,3,3) to gauge the pace of momentum. The persistent negative crossover in stochastics suggests negative momentum remains in place. Since this is a monthly chart, slow stochastics tend to absorb counter moves with possible multi-week duration. But as long as the 88 level is not breached, renewed downside is expected to extend towards the 67-68.00 level.
The Reserve Bank of Australia’s (RBA) preferred inflation measure slowed to 2.7% quarter over quarter in Q2, from 3.0% in Q1, reaching its lowest pace in three years. The case against further RBA tightening is highlighted by the fact that Australian inflation has slowed for the last six quarters as well as a broadening slowdown on the consumer front. And with the overnight rate standing at 4.5% following 150 bps of tightening, forward-looking FX markets may grow reluctant to push the Aussie above key technical levels. The view that rates have peaked will only exacerbate the Aussie’s decline during risk aversion.
On the yen case, seasonal currency strength in mid to late third quarter has been attributed to Japanese repatriation of overseas-based investments for window dressing purposes ahead of the end of the first half of the fiscal year on Sept. 30. As a result, FX speculators have not bet against the yen. Economic and political instability will keep risk appetite down to the benefit of the yen.
The combination of the medium-term technicals and emerging fundamental dynamics increases the downside risk of AUD/JPY for a possible revisit of 57 early in the fourth quarter. In the event of a breakout above 88, AUD/JPY’s ascent could find little obstruction before the 98-100 high.
Ashraf Laidi is chief strategist at CMC Markets, author of "Currency Trading and Intermarket Analysis" and founder of www.AshrafLaidi.com