The Reserve Bank of Australia (RBA) has announced they're set to increase interest rates over the course of this year. Hawkish rate expectations are a bullish indicator for the base currency so in this case the Australian Dollar will most likely appreciate over this next year.
"If spending falls off a cliff, because of a rapid-fire lift in interest rates, we'll tip into recession. And then we'll have a much bigger problem." - ABC News
It will be interesting to see whether the RBA goes for a hawkish or dovish expectations as the rising inflation as this will have a huge impact on exchange rates.
The technology summary page supports traders by identifying the fundamentals of a chosen pair. In this case when selecting AUD and JPY we're seeing bullish signs across the board which is generally a strong sign that fundamentals are strengthening suggesting bulls will be in control.
The following indicators are all showing bullish signs:
Macro currency strength meter
Interest rate differentials
Hedge Fund Sentiment
Now that we know from a fundamental perspective that that data is bullish we can dig deeper into the analysis to find out on a relative basis if other factors are suggesting the same.
Macro Currency Strength Meter
The Macro Currency Strength Meter is one of our main fundamental indicators and we can identify straight away over the past couple months we're seeing the AUD strengthen and the JPY weaken on a fundamental level.
This sets us up straight away as it filters out the market noise allowing us to focus on bullish positions to align our technical analysis with the fundamental analysis.
The GDP Differentials was another fundamental indicator which is agreeing with the fundamental bias from the currency strength meter.
What we're seeing overall is that Australia has a stronger overall growth rate in comparison to Japan suggesting a bullish differential. This means AUS is growing at a quicker pace and bullish in the long-term.
Trade Analysis (Imports/Exports)
Gold is a commodity we've picked to analyse against AUDJPY... one of the main reasons being Australia is known for their exports of raw materials, gold being one of them...
Overall, there's been a positive relationship between Gold and AUDJPY.
The most recent data of Gold shows prices falling drastically, however this has not been reflected in the prices of AUDJPY.
Will we see a downwards movement in AUDJPY...one to keep an eye on.
Iron ore is another core commodity which Australia exports across the world.
What we're seeing across the past couple years is Iron ore tends to be a leading indicator for price movements in the AUD exchange rates.
Since Iron ore is such a big export it has a huge impact on exchange rates as companies, funds and banks trade large amounts to buy Iron Ore for themselves or their clients.
BHP is a large mining company in Australia and we've found that BHP has a huge positive correlation against AUDJPY...
Similar to the previous analysis we're seeing huge downwards movement in the commodity/companies.
This overall suggests that the trade analysis does not agree with the overall fundamentals, which means it would be good to keep a close eye on these companies/commodities to see if eventually they agree with the fundamentals.
Interest Rate Differentials
The interest rates were a big factor in the analysis which are showing very bullish signs.
Japan are infamous for keeping low to negative rates and with Australia looking to increase rates even further the carry becomes an increasingly attractive part of the trade.
Investors now see the most recent interest rates spikes as bullish, with further sentiment of increasing rates this could have another bullish impact on exchange rates.
Hedge Fund Positions
Overall, the hedge fund positions show a positive differential between the open interest.
However, there's no clear sentiment right now as hedge funds are selling both the AUD and JPY.
Ideally, we'd like to see the solid blue line be above 0 or trending that way for higher confidence.
What we can see across the board is a clear upwards trend for the past year.
Recently we've seen the trend come to a slight halt but the question is will buyers come back in control or will that point of resistance hold?
One for the watchlist...