AUD/JPY Technical Conditions Overbought, But Fundamentals Still Supportive

AUD/JPY sits around session highs, last near 108.00. This is fresh highs in the pair back to 1991, see the first chart below. Late March 1991 levels got close to 109.55 in terms of upside levels to watch/potential targets for the market.

• The broader fundamentals still appear supportive for further gains in this cross. Recent data outcomes have heightened RBA tightening expectations, although the deciding factor is likely to be Q2 CPI, which prints at the end of July.
• For Japan, the BoJ is expected to follow a gradual path to tightening, although we should know more next week as the BoJ meets with key stakeholders in terms of its plans around tapering its bond buying plans.
• The supportive global equity backdrop is another factor, with the two series generally moving higher in tandem over recent months, see the second chart below. The same can be said for relative commodity prices, which remain firmly in the AUD's favor.
• The RSI (14) sits at 78.4, which points to overbought conditions from a technical standpoint. This is a risk in terms of the recent rally, which could be exacerbated if we see a fresh round of FX intervention by the Japanese authorities in terms of a downside correction in the pair.
• Such a scenario, if it unfolds, is likely to be deemed corrective though from a fundamental standpoint. The 20-day EMA sits back near 106.00. Dips sub this level were supported in early June.

Fig 1: AUD/JPY To Fresh Highs Back To 1991