Posted Wednesday August 25, 2010 1600EDT

AUD/JPY

Support

   74.00 Daily close low for current decline

   73.50/60 Daily trend line support; intra-day lows for current decline; possible double bottom; weekly Ichimoku cloud bottom (73.82)

   72.70 Early July Tweezers bottom lows

Resistance

   75.70 Daily Ichimoku Tenkan line

   76.70 Daily Ichimoku Kijun line

   77.25 21 and 55-day simple moving averages (sma)

Comments

Risky assets (stocks, commodities, JPY-crosses) have been under intense pressure over the last few weeks as incoming data and news continue to highlight a deteriorating outlook for the global recovery. While we expect continuing weak data in the weeks and months ahead, we think markets may be completing the first wave of risk liquidations and that we are due for a correction higher in risky assets. Price action over the last two days has been quite resilient (initially down in risk, followed by a rebound) in the face of seemingly ever-worsening news, supporting the view that the current risk sell-off may be basing out. AUD/JPY is among the most highly correlated currency pairs to stocks and other risk assets, and it has made a potential short-term double bottom on recent lows at 73.50/60, which is also key daily trend line support and the base of a broad sideways consolidation triangle since late May. Buying AUD/JPY on current weakness anticipates a rebound to upper end of the recent range in the 77.00/79.00 area, where we would look to take profit and ultimately establish shorts for the next round of risk sell-off.

Readers should note that buying AUD/JPY on remaining weakness is a counter-trend trade and stops will need to be diligently followed. The strategy is to buy half of a long AUD/JPY position at current market levels of 74.80 and to buy the second half at 73.90 for an average long rate of 74.35. The stop will be kept tight at just below recent lows for this decline at 73.30 for a total risk of just over 100 pips. The take profit will be for 50% at 77.00 (just below 21/55 day sma) and for the remaining 50% at 78.50 for an average t/p rate of 77.75. If we see the rebound, we'll update with a potential short strategy from the upper end of the range.