High Beta vs. Low Volatility, Copper vs. Gold, and our custom Risk-On vs. Risk-Off ratio have all gone nowhere since the beginning of 2021.
The Australian dollar/Japanese yen also falls into the range-bound category, as the risk-on pair looks a lot like the ratios we just mentioned.
But AUD/JPY has been showing resilience the past few weeks and is currently challenging the upper bounds of its multi-month range.
Since most risk appetite indicators aren’t giving us much in the form of new information these days, an upside resolution from AUD/JPY would be a major development.
It hasn’t happened yet, but things are certainly setting up that way.
In today’s post, we’ll dive into one of our favorite risk-on/risk-off gauges – the AUD/JPY cross - and discuss what it’s currently suggesting about risk-seeking behavior.
Here's a dual-pane chart of the AUD/JPY pair and copper futures:
They stopped going up at the same time last year and are revisiting their former highs together today.
It’s no coincidence that this forex cross looks almost identical to the chart of copper. The Australian economy is rich in natural resources, resulting in a strong relationship between the Australian dollar and commodities.
The AUD represents risk-seeking behavior as it tends to rally with risk assets, especially commodities.
On the flip side, the Japanese yen is more of a defensive play due to the yen carry trade, making it the risk-off side of the equation.
When the AUD/JPY is rising, investors are looking to increase their exposure to risk.
Conversely, market participants are usually in a more risk-averse mode when the cross is falling.
After last week’s whipsaw in copper, we’re watching the AUD/JPY for a decisive breakout above its 2021 highs near 86.
This would be a sign that risk-seeking behavior is re-entering the market and would also support an eventual upside resolution in copper.
The direction in which this crucial risk gauge resolves will provide critical information into the structural outlook of the current rally in commodities and risk assets in general.
For now, we want to err in the direction of the underlying trend, which is higher. But until prices confirm this, the jury is still out on risk appetite.
