Forex Watchlist: Is AUD/JPY the Pair to Watch for H1 2023?!

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 AUD/JPY rose to the top of our longer-term watchlist this week after significant monetary policy events from both the Bank of Japan and the Reserve Bank of Australia.


What did they say and will it lead to a momentum move in AUD/JPY in early 2023? Let’s take a look!


Monetary Policy Divergence Ahead?!

In case you missed it on Tuesday, the Bank of Japan rocked the markets by raising its cap on the 10-year Japanese government bond interest rate from 0.25% to 0.50%.


No one saw this coming, and while BOJ Governor Kuroda said this decision was to improve bond market function and smooth out a distorted yield curve, it looks like traders took it more as a potentially massive shift in Japanese monetary policy away from an extremely stimulative monetary policy regime.


Whether or not this is actually the first step towards monetary policy normalization remains to be seen, but with Japanese wage growth starting to approach a 2.0% y/y rate and the Japanese inflation rate still accelerating (hitting 40-year highs), the odds are better-than-even the Bank of Japan feels like Japan is no longer in deflation mode.



Meanwhile in Australia, the meeting minutes from the Reserve Bank of Australia‘s December 5th rate statement showed that the RBA considered three different options for interest rates, electing to go with a bit more conservative 25 bps hike to 3.10% vs. a 50 bps hike.


What was more surprising though was that a pause from their run of rate hikes was on the table, a significant development signaling that the RBA’s tightening cycle is likely closer to its end relative to other major central banks.


What we have here is a potential monetary policy divergence setup, similar to the Federal Reserve and the Bank of Japan in 2022. The former accelerated rate hikes quickly to fight hyper inflation while the latter held at -0.10% through the year citing transitory inflation conditions.


This is what arguably was the main driver for USD/JPY massive rally in 2022, peaking at around a 30% gain to the upside in November. So, will we see the same magnitude type move  in AUD/JPY?


That remains to be seen, but at the very least, the yen could potentially outperform the rest of the majors IF monetary policy tightening was announced by the BOJ.


This would likely be a similar scenario to the yen’s fellow “safe have” brother Swiss Franc’s price action, which out performed in the second half of 2022 after the Swiss National Bank began to raise interest rates out of negative territory back in June, as seen in the chart below:


So, if the BOJ does signal further monetary policy tightening in early 2023 while the RBA signals a potential end to their rate hike cycle, where could AUD/JPY possibly go in the first half of 2023?


Looking the daily chart of AUD/JPY above, we can see that the reaction from both monetary policy events was fierce as the pair dropped roughly -4% in a single session to test the 87.50 handle at the session lows.


This behavior likely confirmed the downside break of the rising 100 and 200 SMAs, which could bring in further selling from algorithmic traders.


The pair fell to the rising trendline pattern, likely drawing in the attention of technical/price action traders, who are likely setting  up for both bullish and bearish positions depending on if the market consolidates and breaks from this area.


Right now, it’s likely some profit taking may be had from short-term traders ahead of the holiday weekend / end-of-year, which may spark a bounce in the pair to the 90.00 – 92.00 area.



It’s here that we’d be watching the pair closely for resistance and bearish reversal patterns to see if the different classes of traders begin to price in a new trend lower and a monetary policy divergence thesis, which is the higher probability scenario (among a very wide range of potential 2023 scenarios) given the bearish macro environment and the central bank picture painted above.


If so, a logical stop area would be above the swing high patterns and moving averages, and if using the previous major support area around 78.00 to 80.00 as a potential longer-term target, the potential R:R ranges around 1:1 to 2:1 within a one to two month time frame. This assumes this scenario plays out and barring any exogenous shocks to the markets; and is also dependent on one’s entry/exit strategy.


If this is a strategy you decide to go with, and however you decide to setup your trade, just make sure to practice proper risk management and never risk more than 1% on any single trade!