Until recently, movement in the Australian dollar/Japanese yen was dominated by the carry trade. In this scheme, investors borrow money in a nation with a low interest rate, such as Japan at 0.5%, the United States at 2.0%, or Switzerland at 2.75%. The funds are then invested in a nation with a high interest rate, such as New Zealand at 8.0%, Australia at 7.25%, or Iceland at 15.5%, and the investors earn the spread between the two rates. The risk is that fluctuations in the forex trading market can wipe out the investor’s earnings or even capital, as happened with a vengeance in July of 2007 during the first stirrings of the U.S. subprime mortgage crisis.

The dramatic collapse in the centre of the weekly chart illustrates the frantic scramble as investors exited their carry trade positions and AUD/JPY shed approximately 2000 pips in one month. Although the currency pair recovered by early October 2007, such losses had worn some of the shine off the scheme and from then onward investors no longer waited for disaster to actually strike; it was enough for it to threaten, and when it did carry trades would be unwound as fast as trades could be entered.

Between October 2007 and approximately June or July 2008, AUD/JPY therefore served as an indicator for risk aversion. During periods of financial calm, as illustrated by the impressive uptrend during May and June at the end of the chart, the pair rose; however, at the first whiff of financial turmoil, the currency pair fell like a stone as investors sold AUD and bought yen to repay their loans.

During the forex trading week ended 13 June 2008, AUD/JPY disengaged from the carry trade on the unexpected declines in Australian labour force data, consumer sentiment, and demand for housing loans. With an interest rate cut from the RBA suddenly possible, the currency pair reverted to fundamentals although maintaining a strong tilt toward interest rate outlooks.

Another notable driver of AUD/JPY is commodities prices. Because Japan’s economy is highly dependent upon imported fuel, fluctuations in the price of crude oil exert a strong inverse correlation on the yen. On the other hand, as the Australian economy is driven by commodities exports, most notably iron ore, coal, and gold, gains in their prices tend to support AUD in general and in particular against JPY.

Due to the large number of candlestick chart traders in Japan, AUD/JPY like all yen crosses tends to be heavily influenced by crowd behaviour. An orderly currency pair exhibiting few false breaks, it generally respects historical support and resistance levels because of the large number of orders clustered there. When it does break through, trend moves tend to be volatile as crowds of traders jump aboard, followed by rather long periods of consolidation within established ranges, as illustrated below on the current four-hour chart:

Although forex trading is risky by definition and no currency pair can be termed predictable, AUD/JPY has become popular amongst novice traders because of its easy entry and exit point selection. It’s gaining a following amongst North American traders looking for short-term moves after their own banking hours, and remains dependable if a weather eye is kept on the Australian interest rate outlook.