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According to the BIS Triennial Central Bank Survey, the Australian dollar (AUD) and the Japanese yen (JPY) are two of the most widely traded currencies in the foreign exchange market (Forex market). As a result, liquidity is rarely an issue with this currency pair.
It is important to be aware that the AUD/JPY exchange rate is often referred to as a minor currency pair or a cross-currency pair, which means it does not include the US dollar, unlike major currency pairs.
The Australian dollar is a cyclical currency which is sensitive to the global economic cycle. When the economy is doing well (economic expansion), companies increase demand for raw materials (think Chinese companies, one of Australia’s major trading partners). And given that Australia is a commodity-linked currency, known for its exports in metals and minerals—such as iron ore, copper, gold and lithium—the increased demand for commodities and inflows into AUD often underpins the currency, and vice versa for an economy doing poorly (economic contraction).
The Japanese yen, on the other hand, is a safe-haven currency; in times of economic uncertainty, funds tend to flow into the JPY during risk-off markets, making it more of a defensive play, if you will.
As a result, the AUD/JPY currency pair is sensitive to changes in global commodity prices, and will often rise when the global economy is doing well and fall when the economy is contracting (as traders and investors bid the JPY). This is why some refer to this currency pair as a risk barometer. In other words, it tends to rise when investors are feeling more confident about the global economy and fall when investors are feeling more risk-averse.
It should also not surprise you to note that there is a strong positive correlation between the AUD/JPY and the S&P 500. As you can see, based on a 60-day rolling correlation coefficient, the two markets correlate most of the time.
To the new trader, the vast array of different technical trading strategies available is enough to leave most confused. From trend-following strategies to breakout strategies, mean reversion approaches and the carry trade strategy, it can be problematic to select which one to employ.
Trend following is popular for many reasons and is usually adopted as a longer-term trading style (commonly referred to as position trading). Fortunately, the AUD/JPY pairing often delivers reasonably long-term trends to work with. Several ways are used to determine the status of the trend, from basic moving averages and price structure to the ADX trend indicator. The idea is to identify the early stages of an uptrend or downtrend. Alternatively, some traders and investors seek to buy dips or sell rallies as a method of entering a trend that is already underway.
Breakout trading is another common approach and can be as basic as trading a close north (south) of resistance (support) on the daily timeframe to catch any follow-through price action. This type of method can also be used to identify an entry into a trend, though do be aware that whipsaws are common—think bull and bear traps. To help avoid these traps, some wait for a retest of the breached level to unfold, similar to the daily chart below on the AUD/JPY.
Mean reversion strategies involve buying currency pairs that have fallen below their long-term average price and selling currency pairs that have risen above their long-term average price.
A carry trade strategy involves borrowing money in a currency with a low interest rate and investing it in a currency with a high-interest rate. AUD/JPY is a popular currency pair for carry trades, as the interest rate in Australia is typically higher than the interest rate in Japan.
At the macro level, in addition to geopolitical forces and interest rates (monetary policy), fundamental analysis for the FX space involves the assessment of economic aggregates: economic indicators that measure the overall health of the economy, such as a country’s Gross Domestic Product (GDP), the overall level of prices (inflation) and employment numbers. You will often find many refer to this as a top-down approach.
The Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ) set their policy rates in their respective countries. The rate differentials between the two countries can heavily affect the long-term trend of the AUD/JPY currency pair. If a country’s central bank raises its Official Policy Rate to slow economic activity, this can bolster that country’s currency as investment flows to a higher yield. Conversely, a central bank will cut rates to increase economic activity, thus potentially lowering the attractiveness of that country’s currency.
Fundamental analysis (macro) is composed of three key elements:
These three components working in harmony should see clear trending markets and present opportunities to trade. If one of these areas is in disorder, this can cause an issue, making it more difficult to interpret a clearer fundamental picture.
You will find that many traders and investors combine macro analysis to identify a potential long-term trend and employ technical analysis to help recognise entry, exit and risk management.
While having the ability to identify trading opportunities is vital, risk management is an incredibly important aspect of trading any currency pair, including AUD/JPY. It is important to have a risk-management plan in place before you start trading, and it’s important not to deviate from your plan.
With FP Markets, you can trade more than 70 currency pairs, including a wide selection of major, minor and exotic currency pairings. Our range of Forex trading accounts offers traders and investors the flexibility to navigate the Forex market effectively, delivering raw pricing, fast execution, a wide range of trading platforms, global regulation and a dedicated multilingual customer support team.
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