The Australian Dollar is pulling back against the Japanese Yen, with the AUD/JPY trading near 96.70. A Harami candlestick pattern has formed, signalling market uncertainty as the pair nears a key resistance level.
AUD/JPY recently surpassed the 61.8% Fibonacci retracement level at 96.15 from a previous decline. The pair is just above the 200-day Simple Moving Average (SMA) at 95.80, indicating potential support.
Long Term Trend
The long-term trend remains upwards, with the 50-day and 100-day SMAs showing upward momentum. The Relative Strength Index (RSI) is below 70, suggesting a potential pullback as it approaches overbought territory.
A break above 97.00 could lead to gains toward the 78.6% Fibonacci retracement at 98.90. If selling pressure increases, support levels are at 96.15 and 94.10, with further decline possible if these levels are breached.
The Australian Dollar is influenced by Reserve Bank of Australia interest rates, the price of Iron Ore, and China’s economic health. These factors, combined with Australia’s Trade Balance, impact the currency’s value. The strength of the Chinese economy has a direct effect on demand for the Australian Dollar.
Australian Dollar Strength
Given the uncertainty flagged by the Harami pattern as the pair challenges key resistance, we believe a nuanced approach is essential. The long-term upward trend remains our guiding star, but the immediate path is clouded by conflicting signals that derivatives can help navigate.
The fundamental case for Australian Dollar strength is firming up. We note that Australia’s latest quarterly CPI came in hotter than expected at 3.6%, fueling market speculation that the Reserve Bank of Australia will be the last major central bank to consider rate cuts. In fact, minutes from their last meeting revealed a rate hike was actively discussed. This hawkish stance provides a strong tailwind, supporting the underlying momentum shown by the 50-day and 100-day SMAs. Historically, during periods of RBA tightening and solid global growth, such as the powerful rally seen through much of 2021 and 2022, pullbacks in this pair have often been buying opportunities.
However, we must temper this optimism with the realities of its largest trading partner. China’s recent Caixin Manufacturing PMI reading of 51.7 marks a seventh consecutive month of expansion, a clear positive for Australian exports. Yet, this is offset by persistent weakness in their property sector and sluggish consumer spending. This dichotomy is mirrored in the price of iron ore, which, after a sharp rebound, now hovers around $117 per tonne, well below its earlier highs. This economic tug-of-war in China directly feeds the indecision seen in the candlestick pattern and justifies the RSI’s failure to push firmly into overbought territory.
Therefore, we see an opportunity for a bull call spread. By purchasing a call option with a strike just above the market, say at 97.25, and simultaneously selling a higher strike call near that 78.6% Fibonacci level around 98.75, traders can position for a measured grind higher. This strategy limits the upfront cost and defines risk, a prudent move considering the potential for a swift rejection from resistance. For those who believe the conflicting Chinese data will lead to consolidation, selling an out-of-the-money strangle—with a put option below the 94.10 support and a call option above the 97.00 resistance—could be an effective way to harvest premium from the expected churn.
