With the continued widening of the interest rate differential between Australia and Japan, one would expect the currency pair involved to be strengthening toward the AUD side. This has been happening, but it has not been a straight line, as shown on the daily chart, below:


At first the bull trend that initiated 2 February 2009 climbed steeply and surely from its low at 55.54. But the bullish trendline was broken mid-June, and AUD/JPY retracted from its then most-recent reaction high of 80.43, to a reaction low of 70.73—almost a thousand pips in less than a month for contrarian traders and the risk averse who don’t trust the economic recovery.

Redrawing the trendline to account for this new reaction low gives it a gentler slope which nevertheless remains strongly bullish. However, this trendline, too, proved indefensible under the risk averse bears’ attack, and it was broken twice in quick succession, on 28 September and 1 October, as the price action dithered rangebound between support at 76.30 and resistance at 80.00, the two yellow lines, above:

Another redrawing of the trendline to meet the new reaction low, above, lessens the strength of its slant even further. However, it broke yet again on 26 November, falling back to the old support level at 76.30, and requiring yet another redrawing of the trendline, below:

The bull rally which began so strongly has weakened beneath mounting uncertainty. But it remains as determined as ever, with each successive reaction high reaching a bit higher, and each successive low stopping and turning at an established support level. In this manner, AUD/JPY continues to illustrate the market’s acceptance of risk, more than it reflects the underlying strength or weakness of the economies involved. Were the currency pair priced according to that standard only, the strength of the recovery in Australia would have returned AUD/JPY closer to the range of 88.00 to 108.00, where it ranged from October 2006 to August 2008.

Risk events effecting this currency pair for the remainder of the forex trading week include:

Australia’s November employment change and jobless rate, scheduled for release Thursday, 10 December, 12:30 AM GMT (11:30 AM Canberra time). Markets expect the economy to add 5K jobs, mainly part-time, and for the jobless rate to tick higher, to 5.9%. A positive surprise could be in store here, which would tend to push the risk trading AUD even higher. Any negative reading would tend to support JPY instead.

Japan’s November consumer confidence, to be released Friday, 11 December, 5:00 AM GMT (4:00 PM Canberra time). There’s no overall consensus; however, the general expectation is for a slightly lower reading from the previous 40.8. A significantly stronger reading seems unlikely but if it happens, it would support AUD, while a reading significantly weaker would support JPY.

U.S. November retail sales, to be released Friday, 1:30 PM GMT (Saturday, 12 December, 12:30 AM Canberra time). Although it may seem odd that a U.S. data release could significantly influence the movement of a uniquely Pacific currency pair, this one will determine the closing direction of risk acceptance for the week. The consensus appears to be for a gain of 0.6%. Anything higher is AUD risk on, anything lower is JPY risk off.