The Japanese yen is currently at its highest value in 2.5 months, due to traders unwinding their bets against it before a Bank of Japan meeting next week.

As global stock markets experienced a pointy decline recently, market participants moved away from riskier assets and sought refuge in traditionally secure havens just like the Japanese yen.

This shift in risk sentiment led to the unwinding of short positions (bets against) the yen, which is usually used as a funding currency in carry trades.

Within the context of the  JPY, a “carry trade” involves borrowing money in yen, where rates of interest are typically very low and even near zero, after which investing that borrowed money in assets denominated in a higher-yielding currency, equivalent to the US dollar or Australian dollar.

Traders make the most of the carry trade by earning the rate of interest differential between the 2 currencies.

If the exchange rate stays stable or the yen depreciates, they will make a profit by converting the higher-yielding currency back to the yen and repaying the borrowed amount.

Closing out or “unwinding” carry trades involve selling the higher-yielding currencies and buying back the yen, pushing its value higher.

Some analysts consider that traders buying back yen to cover their short positions have likely ended. This might provide some relief for the Australian dollar, which has been getting crushed.

So is the AUD/JPY due for a robust bounce?

Welcome to TA of the Day (TAOTD)! 👋

Here’s the day by day chart:

AUD/JPY 1D Chart by TradingView

📈 Technical Evaluation of AUD/JPY Day by day Chart

Using technical evaluation concepts covered in our forex course, let’s analyze AUD/JPY.

Easy Moving Averages:

• 10-period SMA: Positioned around 104.53. The worth is currently below this level, indicating short-term bearish momentum. The slope is downward, suggesting recent short-term weakness.
• 50-period SMA: Positioned around 105.23. The worth can be below this level, indicating medium-term bearish momentum. The slope is downward, reinforcing medium-term weakness.
• 200-period SMA: Positioned around 99.79. The worth is barely above this level, indicating a possible support zone. The slope is upward, suggesting long-term bullishness, but the value being near this level indicates critical support.

If you happen to’re recent to moving averages read our School of Pipsology lessons on trading moving averages.

Relative Positioning of Moving Averages:

• The 10-period SMA is currently below the 50-period SMA, indicating that the short-term trend is more bearish than the medium-term trend.
• The 50-period SMA is above the 200-period SMA, indicating that the medium-term trend was previously more bullish than the long-term trend, but recent price motion has brought it closer to critical support levels.

Williams %R (14):

• Williams %R: The present reading is -84.34, indicating that the market is within the oversold territory. This implies that the value might face support soon and might be due for a bounce.

If you happen to’re recent too Williams %R read our School of Pipsology lessons on how you can use Williams %R.

🕵️ Key Observations

Price Motion:

• Uptrend Followed by Correction: The worth was in an uptrend until early July, characterised by higher highs and better lows. Recently, the value has faced a major correction from its peak around 109.37 and is currently testing support across the 200-period SMA.

Support and Resistance Levels:

• Support: Immediate support is around 99.79 (200-period SMA). A break below this level could signal further downside.
• Resistance: Immediate resistance is around 104.53 (10-period SMA) and 105.236 (50-period SMA).

Moving Averages:

• The ten-period SMA and 50-period SMA are currently acting as resistance levels, while the 200-period SMA provides critical support.

Williams %R:

• The Williams %R being within the oversold territory suggests a possible for a price bounce or consolidation.

Market Structure:

• Recent Swing Lows and Highs: The chart shows higher lows and better highs until early July, followed by a recent low of around 99.209.
• Change of Character (ChoCh):: A ChoCh occurred when price broke below the previous swing low at 104.00, indicating a shift to a bearish structure.

🤔 Potential Trade Scenarios

Is AUD/JPY a buy or sell?

The next trade scenarios are provided solely for educational purposes. Since they don’t include full risk management practices, they should not intended to function actual trade recommendations, but merely food for thought to show you how to generate your personal trade idea.

Long Bias:

• Consideration Point: Consider entering an extended position if the value finds support near 99.79 and shows signs of a bounce, equivalent to a bullish candlestick pattern or a positive divergence within the Williams %R. Moreover, a break above the resistance level at 104.53 could indicate a possible recovery.
• Invalidation Point: Consider setting a stop-loss below the support level around 98.50 to administer risk.
• Potential Goal: Search for a move towards 104.53 and better if the uptrend resumes.

Short Bias:

• Consideration Point: Consider entering a brief position if the value fails to carry the support level at 99.79 and shows signs of bearish momentum, equivalent to a robust bearish candlestick pattern or the Williams %R remaining in oversold territory.
• Invalidation Point: Consider setting a stop-loss above the support-turned-resistance area at 104.00 to administer risk. This level is crucial as a break above it will invalidate the bearish setup.
• Potential Goal: Initial goal might be the support level around 98.50. If bearish momentum continues, search for further downside towards 96.00 or lower.

📝 TAOTD Summary

• Trend: The long-term trend appears to be bullish with the value above the 200-period SMA, however the short-term and medium-term trends show significant bearish momentum with prices below the 10-period and 50-period SMAs.
• Key Levels: Support at 99.79 and resistance at 104.53.
• Momentum: The Williams %R indicates an oversold condition, suggesting potential for a short-term bounce or consolidation.
• Market Structure: Recent ChoCh indicates a shift in market structure from bullish to bearish.
• Moving Averages Evaluation: The downward slopes on the 10-period and 50-period SMAs indicate strong bearish momentum within the short and medium terms. The 200-period SMA, with its upward slope, suggests critical long-term support, but the value is currently testing this level. Be careful!