You AUD to Pay Attention to This Breakdown

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

The US Dollar Index $DXY has been our main focus as it nears the upper boundary of its recent range.

Where the USD heads next will have wide-ranging implications across asset classes by either providing a tailwind for risk assets or a headwind in the case it resolves higher from its year-to-date range.

But, as the market continues to chop sideways, we want to direct our attention to one of the most important risk gauges in the currency market.

That’s the Aussie-Yen.

In this week’s post, let’s check in on the AUD/JPY to see what information we can glean regarding risk appetite and what it could mean for other markets.

Let’s dive in.

First, we have a daily chart of the AUD/JPY:

Two key elements stand out on the daily chart. First, there’s the recent distribution phase, which we can see in the shape of a frowny face. This topping pattern resolved to the downside back in July and has been coiling in a continuation pattern since.

And this brings us to our second and most recent data point, which is yesterday’s breakdown out of this bearish pennant formation.

Both point to lower prices for the foreseeable future… and we’re already at new 6- month lows. This is classic bearish behavior.

It also does not bode well for risk assets, as a declining AUD/JPY implies a diminishing appetite for risk among market participants.

But if we overlay the AUD/JPY with the S&P 500 ETF $SPY, it looks as if some of the major stock indexes haven’t gotten the memo… at least, not yet.

Notice how closely these two markets have moved together since last fall. But this relationship has rapidly decoupled since June, leaving us with a massive divergence.

This is just one of many divergences supporting our present thesis of a mixed and messy environment for risk assets.

Some stocks have gone up, some have gone down. But most have gone nowhere, chopping sideways in a range-bound mess.

How long will these messy conditions last?

It’s tough to say.

But we have to imagine a healthy resolution higher in stocks will be accompanied by an increase in risk-seeking behavior.

If and when that’s the case, we’d expect the AUD/JPY to catch a bid, or at least stop going down. 

Thanks for reading. As always, let us know what you think.

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