AUDJPY Long Term Fundamental + Technical Short

As stocks have rallied over the past few weeks on risk on sentiment, the JPY has had a pullback, but I see this as a buying opportunity. I believe longer term, the JPY against most other major currencies is a buy. In the media there are a lot of analysts and economists saying the worst is over of the pandemic and the global economy is going to return to growth, I think we are going to see a big sell off in global stock markets and risk currencies. One trade I am looking at is AUDJPY short, I will go over my reasons why. My target for this pair is monthly support at 54.0 which is 2008 lows, potential for 1400 pips if my logic is correct - CADJPY & NZDJPY have similar setups but AUDJPY is my favourite and I believe the AUD will be the one to be hit the hardest and quickest. I will cover the fundamentals behind this now. In terms of AUDJPY, it is a proxy for risk on & risk off sentiment and is heavily correlated with the S&P500 index. As you can see from the chart, we have rallied 9% from the 17% fall, so well over half has been retraced. On Friday, the S&P500 made a new near term high, however the AUD did not. If you look at the stock market rally, there are a lot of economists and investors excited about it and saying stock are a buy. I disagree, if you look back in history at all big falls in stocks, they all have big rallies of 20-30% before making new lows - I see it as a typical bear market rally because there is no large volume supporting it. I think very soon we are going to see a reversal to the leg lower in stocks and this will trigger JPY buying pressure, and AUD selling. In terms of commodities, which are very important to Australia (since they are large exporters of commodities), they have rallied a bit, but I see it is a bear market bounce. The commodities to watch in terms of Australia are iron ore, coal, natural gas, crude oil and copper. Iron ore has been quite firm but there is no big demand coming for Australia’s big export market in my opinion, like China, India etc. In the IMF’s recent report, they predict Australia’s economy to contract 6.7% this year which is more than twice as bad as the 3% contraction forecast for the global economy. I personally think these forecasts are a little bit too optimistic, but the fact is that even the IMF are making it clear that Australia is so exposed to global growth, trade and demand. Another point is China, who is a real big trading partner of Australia, is going to take a massive hit in my opinion. A lot of analysts are saying China is on the road to recovery, after China announced that 80% of the economy is back to work but how can it when its economy is hugely dependant on exports to the global market? Who is it going to export to, there is no demand? In terms of Australia before the pandemic, they had the longest expansion of any economy in history, so I think the AUD was very overbought anyway. My final point is that interest rates have fallen globally around the world, so interest rates a more equal now between central banks. The negative interest rates in Japan have been a big factor in the JPY being soft since 2008, it is historically oversold in my opinion. Now that interest rate differentials are smaller, this is a general bullish fundamental for the JPY. As you can see from the chart, there is a key level and 61% Fibonacci which line up nicely with the fundamentals for the short. I have highlighted the gap which the market is currently testing in red, either I will enter on a failed retest with a stop loss above 70.0 or I will wait to enter on 70.0, depending on how the fundamentals play out through the week which may swing the JPY. Overall, looks like a solid trade, target at the region highlighted at the bottom (54.0-56.0) which is the 2008 crisis low support.

Comment:

Update on AUDJPY, key support level at 70.0 has held. Really like the look of this trade a lot of downside to come I believe. It is clear that the bullish fundamentals has peaked for the AUD. The argument for a V-shaped recovery is totally flawed in my opinion. One of the foundations for the argument is that China is doing well after the lockdown. One point that is true is that Australia has dealt with the pandemic very well, they have managed to contain and control the virus and has eased the lockdown. But in the big scheme of things, Australia is an export led nation, it needs to export, but who is it going to sell to? Last week Australia reported unemployment at 6.2%, which is half of what the current figures are in the US and people look at this and think it is very good. But in reality, the way that Australia measure their unemployment is very different compared to the US - analysts have said the true unemployment figure is likely <10%. In a previous fundamental analysis prior to the pandemic, I picked out the structural problems to the Australian economy, such as low productivity, high debt, low wages, housing bubbles etc. Their economy is not in good shape despite having handled the virus, they need to export to recover. In terms of their major export partner, that is China. China’s export markets have dried up, people argue that China’s work force has been back to work for a while now but that’s no good if the country has no one to sell to, especially with it being an export led economy. In my view, China’s export market has suffered far more than the official data. That leads me onto another point, with the argument of a V-shaped recovery based on China recovering, it is certain that China’s unemployment figures are a lot worse than they say. They reported the unemployment rate at 5.9%, however unofficial reports and research suggests the unemployment rate is probably close to 25% with 70 million jobless - these numbers come from a senior Chinese governing body. With China being an export led nation, internal consumption is also important when looking at the economy, from the data they have provided, the consumer is not spending, and retail sales have collapsed and confidence/morale is likely to be very low. There is also the risk of de coupling of trade due to the virus, e.g. the tensions we have seen between US-China, Trump is blaming China, and this could lead to trade tariffs/restrictions etc. Australia is also involved, already China has put tariffs on some Australian agricultural products and is threatening more on other important sectors such as iron ore - this is a big risk to trade. In terms of the JPY, I think it is still oversold and a lot of upside to come. The reason it has been oversold is due to its negative rates, however now with most major central banks close or at 0% interest rates (Australia once had relatively good interest rates), there is no longer a big yield disadvantage.