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Australian CPI is a core focus for traders and the RBA tomorrow. As we mentioned yesterday, it could become a volatile event if we land either side of the forecast figure. And implied volatility (as the name suggests) seems to think it could become one.
Capital flows from the US have kept the US dollar under pressure whilst bond investors flee the room and send yields soaring higher. Yet investors are now increasingly concerned at the impact rising yields could have on global markets, and their jitters have allowed the Japanese Yen to strengthen once more. We noted that implied volatility was rising on AUDUSD earlier today, but this was to be expected ahead of tomorrow’s CPI data. Yet the renewed strength of the Yen and growing concerns over the bond market has added a layer of risk-off to the session, and sent implied volatility on AUDJPY to its highest level since November 2016. Yet whilst such metrics allow us to assess perceived tension in the markets, it does not take into account market direction. For that we’d need to look at price action.
Since the 5th January we have seen seven failed attempts to break above 89.00-89.07. That prices have moved lower on the daily chart suggests supply resides at this level. The two peaks coincide with a bearish divergence with the RSI to warn of the potential of a double top pattern. And today’s break beneath the 87.21 swing low suggests a run towards (and potentially beyond) the 87.70 low could be on the cards. If we are to see a break of the January low a bearish reversal would be confirmed with an initial target around the 85.45 area.
However, picking tops and bottoms can quickly turn into a fool’s errand but that doesn’t mean we can’t monitor their progress to position ourselves accordingly, if a reversal is confirmed. And in case of AUDJPY, we can use it to monitor global sentiment to consider trading other markets related to risk-off.
If we are to see a decisive break of 87.21, we’d seek a low volatility retracement in line with bearish momentum. For those trading intraday timeframes, bearish trends could be considered as long as it holds beneath the original breakout level.
What may scupper the downside here is if Australis is to print a strong CPI figure tomorrow. And if sentiment is to improve and the Yen weaken, it may even allow for an 8th attempt to crack the 89.07 high. Either way, let price action be your guide.
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