Traditional Risk Gauges At Inflection Points

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

A growing number of domestic and international markets are running into key levels of interest. 

This is a theme we’ve discussed at length over the past six weeks. We've also discussed how we see similar developments in the Commodities and Fixed Income markets.

With this as our backdrop, are you surprised that we're also seeing similar action in the Forex markets right now? 

We aren’t! 

In this post, we'll highlight two traditional risk-on currency pairs, both of which are trading at critical inflection points. 

Let's dive right in.

First up is the AUD/JPY cross. This FX cross is the classic risk-on/risk-off gauge within the currency markets -- and since last November, it has been sending a clear message of “risk-on!”

But the AUD/JPY has found resistance at its former 2018 highs near 85 over the last two months. These former highs are a logical level for price to digest recent gains while forming a tight consolidation.

It’s critical to monitor how price resolves from this consolidation. 

If price moves higher, we are most likely in an environment where risk assets are doing well. If price breaks down, the market environment will probably remain messy.

Next up is the USD/CAD cross. 

Like the AUD, the CAD is tied to an economy rich in natural resources, gaining strength alongside commodities and risk assets. 

Given the choppy market conditions, it’s no surprise to see the USD/CAD pull back to a critical level of former support near 1.27. 

As long as price is below the 1.27 level, the bias is to the downside. But if the USD/CAD breaks back above 1.27, the challenging market scenario most likely persists.

It’s clear that key risk gauges in the Currency market are beginning to consolidate, correct, and hit areas of overhead supply at former highs, along with other areas of the market. 

Pay close attention to Forex pairs like AUD/JPY and USD/CAD, as they offer insight into market developments that affect all asset classes. 

Thanks for reading, and Premium Members be sure to check out this week’s Currency Report below!

If you have any questions, please let us know!