The AUDJPY is an ideal range for an attractive breakout candidate. It is good idea to evaluate each variable range for the breakout potential each currency holds and vice versa.
The Australian Dollar
Australia is one of the most advanced nations in its geographic region with a GDP of slightly above $1 trillion as of 2009. The nation runs a double deficit, both in the current account, and in the budget. To finance these deficits, the Australian central bank (RBA or Reserve Bank of Australia) has been offering higher interest rates than what is usually encountered in other advanced nations. Australia is also a major commodity exporting nation. The currency benefits from, and is handicapped by this interesting cocktail of factors which make it one of the more interesting economies in the world for forex traders.
The Australian dollar has been in circulation since 1966. Prior to that date Australia used to Australian pound, which became a separate currency in 1933.
The Japanese Yen
In contrast with Australia, Japan runs a massive trade surplus with the rest of the world, and while the government is heavily indebted, and suffers from a large budget deficit, most of the financing is through domestic channels, reducing the nation’s exposure to problems in international markets. Japan is poor in raw materials, and much of the nation’s needs must be imported from trade partners, including Australia.
Japanese investors and companies have been active in the Australian market for many years. This exposure improves Australia’s economic performance, but it also means that any withdrawal of Japanese sources of financing has the potential to plunge the nation into a period of economic contraction.
Trading the AUDJPY pair
To trade the AUDJPY pair one must apply the typical carry trading strategies. Use low leverage, pursue a long-term plan, and keep an eye on volatility. It is crucial to recall that as a high-risk trade, the pair is prone to experiencing periods of very severe volatility shocks where the gains of a few weeks, or even months can be wiped out in a few days, or in more extreme cases, a few hours. It is obvious, then, that a layered-entry strategy must be employed in trading the AUDJPY pair while keeping the risk sentiment in the market in mind at all times.
The pair is influenced, above all, by the interest rate differentials between Japan and Australia. Any statement by Japanese authorities that they will abandon their extremely stimulative monetary policy stance will lead to quick and often wild swings in the pair, while commodity and stock market fluctuations also contribute to medium-term volatility. In addition, the commodity purchases and stocking of China, as the most important economy of this region, has a direct impact on the pair’s trends, albeit at a lesser extent. All the other general factors influencing carry trade dynamism have their impact in this pair as well.
One of the top carry pairs in the world, the Australian dollar is buoyed by the vast amounts of Japanese savings which seek higher yield than what is available at the stale domestic Japanese market. With interest rates barely above zero, and the Japanese consumer’s traditions favoring savings over consumption, there’s a constant outflow of yen from Japan. The AUD JPY currency pair is the main beneficiary of this trend.
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