AUD/JPY drops to four-week low, bears look to seize control below 100-day SMA

• AUD/JPY drifts lower for the third straight day and seems vulnerable to sliding further.
• Softer domestic inflation lifts August RBA rate cut bets and undermines the Aussie.
• The BoJ’s hawkish tilt, along with geopolitics, benefits the JPY and exerts pressure.

The AUD/JPY cross remains under some selling pressure for the third straight day on Thursday and drops to a nearly one-month low, during the Asian session. Spot prices currently trade around the 96.20-96.15 area, with bears now looking to extend the downward trajectory further below the 100-day Simple Moving Average (SMA).

The Australian Dollar (AUD) continues to be undermined by softer domestic consumer inflation figures released on Wednesday, which reaffirmed expectations that the Reserve Bank of Australia's (RBA) tightening cycle is over. In contrast, the Bank of Japan (BoJ) last week signalled that conditions for phasing out huge stimulus and pulling short-term rates out of negative territory were falling into place. This, along with the risk of a major escalation of geopolitical tensions in the Middle East, turns out to be a key factor behind the safe-haven Japanese Yen's (JPY) relative outperformance and exerts downward pressure on the AUD/JPY cross.

Bulls, meanwhile, seem rather unimpressed by a private-sector survey, which showed that China's factory activity expanded at a steady pace for the third straight month in January. In fact, China's Caixin Manufacturing PMI remains unchanged at 50.8 in January as compared to market expectations for a downtick to 50.6. This, however, does little to benefit the China-proxy Aussie. Apart from this, weakness below the 100-day SMA suggests that the path of least resistance for the AUD/JPY cross is to the downside. Hence, a subsequent decline back towards retesting the YTD trough, around the 95.85 region, now looks like a distinct possibility.

Technical levels to watch