The Australian dollar has resumed its bearish trend against the Japanese yen ahead of both the RBA rate decision and Japan Prime Minister Abe’s stimulus package announcement. The majority of analysts are expecting the RBA to cut the Cash Target Rate by 25 basis points to 1.50. The RBA July Minutes highlighted the expectation that inflation is likely to remain low for some time. Recent data on manufacturing activity, consumer prices, employment and business confidence mostly missed forecasts or prior readings in July, but not by significant levels.
If the RBA cuts, we could see AUD/JPY fall immediately towards the 76.00 handle. The next key support level is the 72.50 level. A break below there could open the door for a selloff targeting the 70.00 handle. It is around that area that price could form a bullish ABCD pattern. Point D is targeted with the 127.2% Fibonacci expansion level.
If we do not see any action from the RBA, we could see price spike higher towards the 79.18 area. Further upside however may be limited. Major resistance will come from the 50-day SMA, which currently trades at the 83.12 level.
There is no set time for Prime Minister Abe to unveil his new stimulus plan. If Japan’s economic package is less than ¥28 trillion of which budget measures will be ¥13.5 trillion, we could see a 1-2% drop in AUD/JPY.
The trade: Sell AUD/JPY at 77.50, with a stop loss at 78.50 and take profit at 74.50. The risk/reward ratio is 1:3