The AUD / JPY currency pair, which expresses the value of the Australian dollar in terms of Japanese yen, is generally strongly positively correlated with the feeling of market risk. The Australian dollar, or AUD, is associated with risk-taking activity (especially since Australia is a key exporter of raw materials), while the Japanese yen, or JPY, is considered a geopolitical refuge ( due to Japan’s relative political stability and the current situation). account surplus).
In addition to the conventional factors that govern AUD / JPY, the positive correlation between the pair tends to find additional support and longevity due to a self-fulfilling prophecy, in the sense that FX traders will often buy AUD crosses. and sell JPY crosses to express their sense of risk or risk.
The daily candlestick chart below shows the AUD / JPY price action, including a Fibonacci retracement tool which indicates that the recent upward retracement (at handle 69) corresponds to the key retracement level of 61, 8% (using certain recent key price points).
((Graph created by the author using TradingView. The same applies to all of the following candlestick tables presented below.)
The Australian dollar is constantly falling against the US dollar (or USD) and the Japanese yen. Recent movements, including the sharp decline that began in late February 2020 and continued into March, as well as the subsequent upward retracement from late March to today, are positively correlated with the direction of global stocks.
As the graph below shows, AUD / JPY and US stocks (using the S&P 500 index as an indirect indicator of the performance of US stocks, illustrated by the blue line) have risen after significant falls. In the author’s opinion, the recent increases are unlikely to be sustainable. A drop should be expected in the short term.
As discussed in a recent article, the world is currently facing significant and frankly unprecedented economic challenges. These challenges arise not from COVID-19, but from government measures to tackle COVID-19. The question of whether these are the right measures is a question not only of economics but also of ethics, and therefore perhaps of philosophy. A compromise had to be made between saving lives or preserving the economy.
In fact, the problem was not as clear as that, because it is clear that lives would have been lost and the economy would have been affected regardless of politics. However, there is certainly a spectrum type compromise. I have created the table below, which, I believe, articulates the main trade-offs here.
On the horizontal axis, we have the compromise between saving lives and preserving (or rather now, saving) the economy. The vertical axis represents the compromise between achieving collective immunity (that is, immunity to the virus in at least 60% of the population) and eradicating the virus.
So far, it appears that government policy has been aggressively geared towards saving lives and even an attempt to eliminate the virus through self-isolation and quarantine of infected and uninfected individuals, as well as by generalized blockages. Although the restrictions are described as attempts to “flatten the curve” (reduce the number of people infected per unit of time, to ease the burden on public health systems), the implementations so far are significantly close of those which would be applied if we sought a total eradication of the disease.
Marked by the red dot in the graphic above, I think we and our governments are, philosophically. The arrow represents where I think we will progress collectively. The media has put significant pressure on governments to implement lockouts and save lives. The media are important because the media are supposed to be there to inform us. The media directly affect the collective opinion of the electorate and, of course, politicians must act to serve and satisfy the electorate. I think it will become increasingly clear that COVID-19 cannot be stopped and that collective immunity must be achieved.
COVID-19 is a contagious respiratory virus that has already become a pandemic. Unless we are lucky, the virus will likely continue to spread until a certain level of collective immunity is reached. Closures can slow the spread, but reopening the economy will only pave the way for a further spread, so nature must take its course.
Besides natural spread and / or a strategy of variolation (i.e. deliberately infecting healthy patients with a small exposure to the virus, to promote immunity), we can also consider the development of a vaccine . However, even if I expect a narrative shift from current approaches to more collective and pro-economic immunity strategies, this shift will take some time politically (before people are favorable).
“Narrative change” may require closing more businesses and more people losing their jobs, before the world begins to move firmly in another direction. This alternative direction should be bullish for the feeling of risk, and therefore AUD / JPY. However, this change will take time and, in the meantime, the economic data will continue to be disappointing. Even after a change in strategy, volatility should remain high.
In fact, some damage has already been done, and other economic damage will be done, before you start to “get the economy going” and move on. In the end, we must not bet against humanity; this whole ordeal will most likely set us up for a large bull market. However, I do not think there is still time to be optimistic.
It is interesting to note that the AUD / JPY maintained its correlation with the recent rise in equities. This suggests that the sentiment of global investors has actually improved (that is, the FX world “confirms” the movement of US stocks); a divergence would be more worrying. However, it is likely that the recent decision is wrong.
The brutal upward retracement (both in equities and in crossover risk on FX) suggests that the previous bullish sentiment that characterized the longest bull market in history is still alive. Before getting another bull market, I think we will see more downside volatility, as markets should more appropriately assess the current damage and risks to the global economy and financial markets.
In this regard, this author expects smaller declines in US stocks and especially in the AUD FX crosses, including AUD / JPY.
Disclosure: I have / we have no positions in the stocks mentioned, and we do not intend to take any positions in the next 72 hours. I wrote this article myself and it expresses my own opinions. I do not receive any compensation for this (other than from Seeking Alpha). I have no business relationship with a company whose actions are mentioned in this article.