AUD/JPY Tracking Lower, Weaker Commodities Offsetting Equity Bounce

AUD/JPY is biased lower in early Tuesday dealings, the pair last near 104.10/15. Intra-session lows from Monday came in just under 104.00, the pair having lost nearly 1% for the session. This brings the correction off recent highs to 4.7%.

• Current levels have us back at mid June levels, we are sub the 20 and 50-day EMA (near 105.20 for the 50), but still above the 100-day, near 103.25.
• The cross has been weighed by the recent correction lower in global equities and commodity prices. AUD/JPY's correlation (in levels terms) with commodities is around 74% (for aggregate and metals sub index from BBG), while for global equities it is slightly higher at 87% year to date.
• We didn't see much benefit from the global equity bounce on Monday in terms of cross performance, with lower commodities, particularly in the metals space amid on-going China growth concerns, offsetting.
• Also noteworthy is that AUD/JPY technical conditions are not yet oversold based off the RSI (14), see the chart below.
• AUD/JPY longer term bulls may not step in until we have reached an oversold threshold. They also may want to see some stability in commodity prices, particularly on the metals front.
• Next week also carries key event risks for both legs of the cross. We have the BoJ outcome next Wednesday, along with Q2 CPI print in Australia. The BoJ is seen on hold but headlines from the LDP's Motegi, stating the central bank should articulate policy normalization and that the weak yen is negative for the Japan economy is adding interest to the meeting (per BBG/Nikkei).
• Relative yield differentials carry a correlation of close to 50% for the past year, so below the global drivers outlined above, but still could be influential next Wednesday.

Fig 1: AUD/JPY Continues To Correct Lower