The Japanese yen is currently at its highest value in 2.5 months, thanks to traders unwinding their bets against it before a Bank of Japan meeting next week.
As global stock markets experienced a sharp decline recently, market participants moved away from riskier assets and sought refuge in traditionally safe havens like the Japanese yen.
This shift in risk sentiment led to the unwinding of short positions (bets against) the yen, which is often used as a funding currency in carry trades.
In the context of the JPY, a “carry trade” involves borrowing money in yen, where interest rates are typically very low or even near zero, and then investing that borrowed money in assets denominated in a higher-yielding currency, such as the US dollar or Australian dollar.
Traders profit from the carry trade by earning the interest rate differential between the two currencies.
If the exchange rate remains stable or the yen depreciates, they can make a profit by converting the higher-yielding currency back to the yen and repaying the borrowed amount.
Closing out or “unwinding” carry trades involve selling the higher-yielding currencies and buying back the yen, pushing its value higher.
Some analysts believe that traders buying back yen to cover their short positions have likely ended. This could provide some relief for the Australian dollar, which has been getting crushed.
So is the AUD/JPY due for a strong bounce?
Welcome to TA of the Day (TAOTD)! 👋
Here’s the daily chart:
AUD/JPY 1D Chart by TradingView
📈 Technical Analysis of AUD/JPY Daily Chart
Using technical analysis concepts covered in our forex course, let’s analyze AUD/JPY.
Simple Moving Averages:
- 10-period SMA: Positioned around 104.53. The price is currently below this level, indicating short-term bearish momentum. The slope is downward, suggesting recent short-term weakness.
- 50-period SMA: Positioned around 105.23. The price is also below this level, indicating medium-term bearish momentum. The slope is downward, reinforcing medium-term weakness.
- 200-period SMA: Positioned around 99.79. The price is slightly above this level, indicating a potential support zone. The slope is upward, suggesting long-term bullishness, but the price being close to this level indicates critical support.
If you’re new to moving averages read our School of Pipsology lessons on trading moving averages.
Relative Positioning of Moving Averages:
- The 10-period SMA is currently below the 50-period SMA, indicating that the short-term trend is more bearish than the medium-term trend.
- The 50-period SMA is above the 200-period SMA, indicating that the medium-term trend was previously more bullish than the long-term trend, but recent price action has brought it closer to critical support levels.
Williams %R (14):
- Williams %R: The current reading is -84.34, indicating that the market is in the oversold territory. This suggests that the price might face support soon and could be due for a bounce.
If you’re new too Williams %R read our School of Pipsology lessons on how to use Williams %R.
🕵️ Key Observations
Price Action:
- Uptrend Followed by Correction: The price was in an uptrend until early July, characterized by higher highs and higher lows. Recently, the price has faced a significant correction from its peak around 109.37 and is currently testing support around the 200-period SMA.
Support and Resistance Levels:
- Support: Immediate support is around 99.79 (200-period SMA). A break below this level could signal further downside.
- Resistance: Immediate resistance is around 104.53 (10-period SMA) and 105.236 (50-period SMA).
Moving Averages:
- The 10-period SMA and 50-period SMA are currently acting as resistance levels, while the 200-period SMA provides critical support.
Williams %R:
- The Williams %R being in the oversold territory suggests a potential for a price bounce or consolidation.
Market Structure:
- Recent Swing Lows and Highs: The chart shows higher lows and higher highs until early July, followed by a recent low of around 99.209.
- Change of Character (ChoCh):: A ChoCh occurred when price broke below the previous swing low at 104.00, indicating a shift to a bearish structure.
🤔 Potential Trade Scenarios
The following trade scenarios are provided solely for educational purposes. Since they don’t include full risk management practices, they are not intended to serve as actual trade recommendations, but merely food for thought to help you generate your own trade idea.
Long Bias:
- Consideration Point: Consider entering a long position if the price finds support near 99.79 and shows signs of a bounce, such as a bullish candlestick pattern or a positive divergence in the Williams %R. Additionally, a break above the resistance level at 104.53 could indicate a potential recovery.
- Invalidation Point: Consider setting a stop-loss below the support level around 98.50 to manage risk.
- Potential Target: Look for a move towards 104.53 and higher if the uptrend resumes.
Short Bias:
- Consideration Point: Consider entering a short position if the price fails to hold the support level at 99.79 and shows signs of bearish momentum, such as a strong bearish candlestick pattern or the Williams %R remaining in oversold territory.
- Invalidation Point: Consider setting a stop-loss above the support-turned-resistance area at 104.00 to manage risk. This level is crucial as a break above it would invalidate the bearish setup.
- Potential Target: Initial target could be the support level around 98.50. If bearish momentum continues, look for further downside towards 96.00 or lower.
📝 TAOTD Summary
- Trend: The long-term trend appears to be bullish with the price above the 200-period SMA, but the short-term and medium-term trends show significant bearish momentum with prices below the 10-period and 50-period SMAs.
- Key Levels: Support at 99.79 and resistance at 104.53.
- Momentum: The Williams %R indicates an oversold condition, suggesting potential for a short-term bounce or consolidation.
- Market Structure: Recent ChoCh indicates a shift in market structure from bullish to bearish.
- Moving Averages Analysis: The downward slopes on the 10-period and 50-period SMAs indicate strong bearish momentum in the short and medium terms. The 200-period SMA, with its upward slope, suggests critical long-term support, but the price is currently testing this level. Watch out!