AUD/JPY tumbles like we’re in a crisis, Nikkei hammered by stronger yen

• AUD/JPY most oversold on RSI (14) since pandemic plunge
• It’s rare to see such violent moves outside of crisis periods
• USD/JPY unwind tops 5%, weighing on Japan’s Nikkei 225

JPY carry trades unwinding like we're in a crisis

You don’t see unwinds of Japanese yen carry trades like we’re seeing right now outside of crisis periods. It doesn’t feel like we’re in a crisis, making me wonder just how long the current bearish move will last? AUD/JPY has been among largest casualties, hammered lower by a combination of China pessimism, large declines on Wall Street and narrowing yield differentials between the United States and Japan.

I discussed a short setup in AUD/JPY yesterday, but such has the speed of the unwind been it’s nearly reached the target after falling more than 150 pips, extending the decline from the recent peak to over eight big figures.

While I think there’s more downside to come, it’s rare for such a liquid FX pair to move so sharply in one direction for a sustained period. Even during my time on the desk during the height of the GFC, we saw massive countertrend rallies in what ended up being the largest carry trade unwind on record.

As such, when the market provides the signal, I’m positioning for a bounce with the help of long-running uptrend support which is located just 40 pips below where AUD/JPY currently trades. 

AUD/JPY trade ideas 

Should it hold, or if the market is unwilling to test it in early Asian trade, buying with a tight stop around 100.70 is one setup, allowing traders to target a push back towards horizontal support at 102.64. However, should the uptrend be taken out, 100 and the 200-day moving average at 99.82 are the next downside targets.

To put in context just how oversold AUD/JPY is, on RSI (14) you have to go back to the panic at the start of the pandemic to find a similar reading.

Nikkei hit by stronger yen 

With USD/JPY slicing though downside supports like a hot knife through butter, the stronger yen has weighed on Nikkei 225 futures, diminishing the prospects for stronger export earnings at a time when concerns about the Chinese and US economies are rising.  

The correlation between USD/JPY and Nikkei futures has strengthened since the start of July, sitting at 0.86 over the past fortnight. It’s becoming clear that much of the Nikkei’s outperformance earlier this year was yen-related, rather than excitement about reforms to boost shareholder returns.

With USD/JPY down 5% from the recent highs, it’s seen Nikkei 225 futures break through the uptrend established in April, extending the bearish move following a break of the 50-day moving average earlier in the week.

With MACD and RSI continuing to signal building downside momentum, it brings a potential rest of minor support at 37920 and 37610 into play. Should they go, 37000 will be on the radar for bears with the 200-day moving average sitting not far below. 38850 – the former uptrend – is the first topside level of note.

Before initiating any positions, it may pay to keep an eye on what USD/JPY is doing given the close correlation between the two recently.

-- Written by David Scutt

Follow David on Twitter @scutty