AUD/JPY – the FX Barometer of Risk - Is in No Mood for Risk

As my colleague David Scutt noted this morning, AUD/USD has resumed its role as a China proxy, and currently being dragged lower alongside iron ore, copper and sentiment on the Chinese economy in general. Add into the mix hawkish please from Japan’s government officials and the unwind of carry trades, AUD/JPY is on the ropes and desperately hoping the bell rings.

At the time of writing, AUD/JPY is amid its worst 10-day selloff since March 2022. Yes, back when markets were in turmoil as the pandemic began to take hold. The 10-day rate of change (ROC) is now -5.9%, which is less than half the -12.3% 10-day drop seen in March 2020, yet around the average significant drop since then (significant defined as a -3% then-day drop). The question now is how much more downside there is for the cross.

AUD/JPY 10-day rate of changes since the pandemic (over 3% declines)

18 March 2020: -12.3%
19 June 2020: -4.3%
25 September 2020: -4%
19 July 2021: -3.8%
19 August 2021: -3.5%
12 May 2022: -5.3%
26 September 2021: -5%
22 December 2021: -4.5%
AVERAGE: -5.3%

Yes, things are not great, but they are not ‘pandemic’ bad either. And as we’ve already seen a near 6% drop over the past 10 days, perhaps some mean reversion is due. Personally I do not want to be catching a falling knife and happy to step aside and fade into rallies at better prices. But with several key markets at or around support levels, I’m inclined to believe we’re at or near the end of this initial leg lower.

These may not be ideal levels to short AUD/JPY

Copper futures are holding above yesterday’s low and hovering near the March high. Iron ore futures are approaching the June low. AUD/USD appears in no such to break beneath the 200-day EMA, and the 200-day MA is less than a day’s typical trading range away. GBP/JPP is fast approaching the 200 handle and trend support on the daily. AUD/JPY is toying with the June low and 100-day EMA, but as of yet there is no form commitment. For what its worth, the CSI 300 is not extended its selloff today, and a 50% retracement level and June low are not too far lower for potential support.

If China sentiment has AUD/JPY on the ropes, then we’ll likely need a significant moral boost from Beijing to reverse this freight train. And right now that appears unlikely. Bears may want to fade into rallies for a better-timed entry.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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