The Aussie dollar pulled back early on Wednesday as risk appetite has suffered. The interest rate differential continues to make this an intriguing long.
AUD/JPY
The Aussie dollar tried to rally a bit in the early part of the session but has pulled back toward the 114-yen level again. The 114-yen level is an area that I think a lot of people will continue to pay close attention to because quite frankly, it had been such an obvious area of resistance previously. With that being the case, I like the idea of buying this pullback and trying to get long yet again.
The interest rate differential obviously favors Australia and probably will forever, so in this environment, I think it makes a lot of sense that eventually we grind higher. We have a lot of support right around the 114-yen level and then again at the 113.5-yen level.
Interest Rate Differentials and Global Yen Trends
To the upside, we could go as high as 116 yen relatively soon, but we need some type of catalyst and that catalyst might actually come from the way the US dollar trades against the Japanese yen as the markets are watching a massive swing high from 1990. Interest rates in America are climbing rather rapidly and that could lead to even more gains in that pair.
If the Japanese yen gets absolutely crushed against the US dollar, that will lead a cascade of yen selling around the world. If we do pull back from here, it's really not until we break back below the 110-yen level that I would consider this a market that may have changed its overall trend.
That doesn't mean that I would be short, it just means that I wouldn't be a buyer. Interest rate differential pays you at the end of every day and that's part of what I'm looking at here; you get a little bit of money added to your account each and every day as you hold onto a very long-term uptrend.