AUD/JPY Price Forecast: Weakens below 109.50 as bearish signals reinforce downside bias

The AUD/JPY cross trades in negative territory around 109.30 during the early European trading hours on Tuesday. The Japanese Yen (JPY) strengthens against the Australian Dollar (AUD), bolstered by heavy official intervention.

According to quarterly figures released by the Ministry of Finance (MOF) on Monday, Japan conducted currency market interventions on three days between July 30 and August 3. The largest intervention took place on July 30, totaling 7.98 trillion JPY ($50.36 billion), exceeding the previous record of 6.28 trillion JPY set on April 30.

"The enormous scale of intervention underscored the government's sense of urgency to stem the yen's decline," said Tsuyoshi Ueno, senior economist at NLI Research Institute.

Additionally, expectations of further rate hikes from the Bank of Japan (BoJ) might contribute to the JPY’s upside. The summary for the October 29-30 meeting released Tuesday indicated that many board members see a near-term interest rate hike as necessary, signaling there’s a good chance for a December move.

Yen gains support as BoJ tightening hopes and JGB dynamics bolster JPY outlook

Analysts at Rabobank highlight that the JPY has been a standout performer this year, noting that “the JPY is the second best performing G10 currency in the half year to date.” They acknowledge that this “strong ranking has been obtained with the support of sizeable FX intervention over 3 days during the summer, which included joint support with the US Treasury,” but also stress that the currency has recently held its own. On a shorter horizon, they point out that “the JPY has managed to outperform the USD on a 1-month view with the market displaying a clear reluctance to push USD/JPY above the 158.70 area which coincides with the 200-day sma.”

Rabobank observes that the “sell-off in the Nikkei 225 at the end of last week depressed market expectations regarding the chances of a December BoJ rate hike,” yet they argue that “the strength of September wage data supports the potential for further policy tightening both next month and into next year.” In their view, this backdrop “suggests USD/JPY can edge lower to the 155.00 area on a 3-month view.” They add that “another component of any JPY turnaround would likely be a more robust tone in the JGB market,” which “could contribute to a more supportive backdrop for the JPY in the months ahead.”

On the domestic side, Rabobank notes that “Japan’s primary deficit is better than the G7 average and there is speculation that Japan’s huge asset managers may be tempted to repatriate to take advantage of higher JGB yields. This would have positive implications for the JPY.” Looking ahead, they flag that “Q3 GDP data and October national CPI inflation, both due next week, will be of interest to BoJ watchers,” and conclude that they “remain cautiously optimistic on the medium-term outlook for the JPY.”

Technical Analysis: AUD/JPY retains a negative bias below the 100-day SMA

In the daily chart, AUD/JPY keeps a bearish near-term tone as spot holds below the 20-day simple moving average and the 100-day simple moving average. Price is slipping back toward the lower Bollinger Band suppor, while the Relative Strength Index (14) at about 41 stays below the neutral 50 line, hinting that downside pressure remains in control despite the recent bounce from oversold territory.

On the downside, the lower limit of Bollinger Band at 108.85 forms immediate support level. A clear break below this floor would expose the November 6 low of 108.24, followed by the February 13 low of 107.70. 

On the bright side, initial resistance level stands at the 110.00 psychological level, en roure to the 20-day SMA at 110.30. The key hurdle to watch is the 110.70-110.75 zone, representing the upper boundary of Bollinger Band and the 100-day SMA, a dense supply zone that would need to be reclaimed to ease the prevailing bearish bias.