COVID-19 Risk

Today started with strong risk on tones but take a look at the AUDJPY pair in case the COVID-19 cases pick up again. There are a few key technical areas in play on the chart.
Also, the latest Beijing outbreak of COVID-19 cases will be under careful scrutiny for the next few days. Approximately 30% of Australia’s GDP comes from trading with China. So, any more news of the second wave of infections within China that will cause the AUD to weaken. The risk here is real as yesterday mainland China reported 8 out of the 16 districts having cases in Beijing.

US-China and US-Australia trade tensions

Although quiet to start the week there are ongoing trade disputes between China, US, and Australia. These can all flare up from time to time, especially as US elections fast approach. For the US part of the America First policy involves President Trump redressing perceived imbalances in trade between the US and China. Every time the anti-China talk escalates into anti-China action we see risk-off and the AUD sold. The key part of this is recognising that the market responds to ‘action’ not just ‘talk’.

10-year yields weigh on the AUD

The Australian 10-year bond market has a very close parallel to the AUDUSD pair. The recent drop in bond yields we have seen post the Fed meeting last week has added further downside for the pair.

JPY strength

The same reasons above that weaken the AUD will also, simultaneously, strengthen the JPY. This is because of the JPY’s safe-haven status. The outlook for an AUDJPY bearish bias remains in place as long as the above tensions remain. The key trigger for this outlook will be if the COVID-19 cases rise again.

Some technicals on AUDJPY

Here are three places to look for. Expect breaks on either of these trendlines below. The two most obvious ones are marked on the chart. Also, expect sellers on any retracements back to swing highs, again marked on the chart. However, remember that if the risks of COVID-19 second waves dissipate, then the AUDJPY bearish bias will disappear too. See the chart at the top.