AUD/JPY falls under 200DMA, last week’s lows as its tracks US equity market downside

• AUD/JPY fell below last week’s lows and its 200DMA in the 82.60s and is now under 82.50.
• The pair has been moving lower to reflect the continued downturn in US equity markets driven by Fed tightening fears.
• AUD traders will be watching November Australian Retail Sales data and how the Aussie Omicron outbreak develops this week.

As US equity markets continue where they left off with things last week by tumbling at the start of this week, risk-sensitive currencies have also been taking a hit. As a result, AUD/JPY, a particularly risk-sensitive currency pair given the AUD’s high beta to risk appetite versus the yen’s appeal as a safe-haven asset, has dipped below a key area of support in the 82.60s on Monday. The pair has now even dipped below the 82.50 mark, though the losses are for now being contained as the 21 and 50-day moving averages in the 82.43-82.48 area offer support.

But AUD/JPY’s tumble back from earlier session highs in the 83.30s saw it fall beneath its 200-day moving average at 82.65, which coincided with last week’s lows, a far more significant area of support to break. Should the 82.50 area, which has been an important zone of market balance in recent weeks, break, then AUD/JPY may well continue lower. Given a lack of notable areas of support to the immediate downside, short-term bearish speculators may bet on a drop all the way to test mid-December lows in the 80.50 area.

The main fundamental catalyst for Monday’s downturn in the pair, and more broadly in the market’s appetite for risk, are fears about Fed tightening and the impact on the US equity space. These fears may well be exaccerbated with a number of key Fed speaks on deck this week (including the Fed Chairman and Vice Chairwoman), as well as if Wednesday’s release of the December Consumer Price Inflation report comes in as hot as expected. That suggests downside risks for AUD/JPY.

Aussie fundamentals will also be a driver. Australian November Retail Sales figures are out on Tuesday and should show a continued decent pace of recovery from the recent lockdown induced contraction earlier in the year. But the latest numbers pertain to a time before Australia experiences its first (Omicron driver) serious Covid-19 outbreak, which has been accelerating since December. Wells Fargo note “the latest increase in cases has not seen any imposition of widespread restrictions so far, and we believe Australia remains on course for respectable economic growth this year”, while Credit Agricole notes that “if Australia’s omicron wave were to follow the South African pattern of cresting and coming off quickly, this would be a positive for the currency (AUD)”. Either way, it's an important theme for AUD traders to keep an eye on.