The market sees the Yen as a one-way bet to go down but when the market sees no end in sight to a trend this is very often when you get a trend change. Our view of the fundamentals sentiment and technicals in terms of AUD/JPY below.
The Yen has been weak on all major currencies due to the Bank Of Japan holding rates down in Japan while other central banks are hiking rates. The market doesn’t see Japan changing its policy any time soon so speculators have sold the low yielding Yen and bought higher yielding currencies including the AUD.
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Why the Oversold Yen Could Mount a Major Rally
Goldman Sachs sees the JPY as a hedge against global recession and we are on the verge of one right now. If equity prices continue to fall this will help the oversold yen. GS also estimates the JPY is more than 25% undervalued in terms of being way from its historical fair value.
GS FX note: “Yen depreciation and higher global commodity prices have lifted inflation in Japan. As our rates strategy colleagues note, this has resulted in expectations for a change in monetary policy and significant dislocations in Yen rates markets.”
“Over the past week Market News International reported that rising global rates and Yen weakness may be moving the BoJ towards a policy change, which could come in the form a language tweak at the July meeting (e.g., dropping the reference to covid outbreaks) which could then “allow a modification of easy policy after the summer” (e.g., at the September meeting).”
They think traders should consider taking call options now, and look to go long the Yen in spot on clear weakness in the US labor market and/or signs of an imminent change in the BoJ’s policy stance”
The key report for the JPY will be the Tankan survey on Friday and also CPI inflation data.
The market is too bearish of the Yen, too short and the fundamentals they have sold it on yield differentials could be priced in. Also we have a slowing global economy which is historically bullish for the safe haven Yen and bearish for the commodity currencies.
The key level of resistance on the upside and levels of support on the downside are on the chart below: