The AUD/JPY rallied a bit during the trading session on Wednesday, as we are trying to recover from the massive selloff in all of the yen-related pairs. After all, the Bank of Japan has now authorized the 10-year bond to trade as high as 0.5%, and there was a massive readjustment of the ultimate trading action when it comes to the yen as a result.
Remember, the Bank of Japan was printing unlimited yen to buy unlimited bonds. However, in the last 24 hours, we have seen the 10-year Japanese Government Bond trade all the way up to the 0.46% level, suggesting that we are getting closer to the end already than one would have thought. The Bank of Japan simply must do everything it can to defend the 0.50 level, or risk being blown out by the rest of the market. Because of this, I suspect that we will eventually see some type of recovery. The question of course is going to be whether or not the recovery is sustainable.
Be Cautious
From a pure interest rate standpoint, it does make a lot of sense that this pair would continue to go higher because quite frankly the Bank of Japan is light years away from catching up to the Reserve Bank of Australia. However, there’s also a risk appetite equation to take into the back of your mind as well, so if we start to see a lot of “risk on behavior”, we may see the market rally. The ¥90 level of course is an area that will attract a lot of psychological noise, as it is a large, round, psychologically significant number.
I anticipate that we will probably try to bounce toward that area but will we do then will be truly important. We probably make a longer-term decision in that general vicinity, but only time will tell. If we break down below the bottom of the candlestick for the trading session on Tuesday, that will more likely than not send this market plunging. Either way, a little bit of a short-term rally does make a certain amount of sense, just due to the fact that the pair lost 5% and one trading day, which obviously is extraordinarily overdone. The lack of liquidity could also come into the picture, so be cautious about that as well.
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