AUD/JPY May Extend Losses as Growing Virus Cases Sour Risk Appetite

Australian Dollar, Japanese Yen, AUD/JPY, Coronavirus – TALKING POINTS

• Wall Street stocks hammered by alarming EU data, growth forecasts and rising Covid-19 cases

• Haven-linked US and anti-risk JPY rose at the expense of AUD, NOK. Sterling rose on politics

• AUD/JPY may pullback mid-recovery after breaking out of a steep descending resistance range

Stocks trading on Wall Street ended the day hunched over, with the Dow Jones, S&P 500 and Nasdaq indices closing 1.51, 1.08 and 0.86 percent lower, respectively. The source of risk aversion came not only from fundamental elements like the growing number of Covid-19 cases but also from data publications. German factory orders on a year-on-year basis reported a 19.3% contraction, worse than the -16.9% estimate.

As the largest economy in the Eurozone, statistics in Germany carry a premium over its European peers in terms of market impact. Furthermore, Brussels warned that the Eurozone economy will shrink 8.7% in 2020, a full percentage point lower than the prior forecast. This accompanied warnings from officials who said that risks are “exceptionally high and mainly to the downside”.

These comments and reports hammered the Euro along with cross-Atlantic equities, and was also reflected in currency markets. The petroleum-linked Norwegian Krone was the sessions biggest loser with its growth-oriented peers like the Australian, New Zealand and Canadian Dollars also suffering. The haven-linked US Dollar erased some of the losses it had incurred over the past few weeks while JPY traded mixed.

Despite geopolitical uncertainty and a darkening outlook for European growth prospects, the British Pound was the sessions biggest winner. GBP rose around the same time news broke that chief Brexit negotiators from the UK and EU will be holding informal trade talks at a dinner on Tuesday night.

The politically-induced move demonstrated that Sterling continues to remain hostage to the binary outcome of Brexit. Later in the day, reports crossed the wires that UK Prime Minister Boris Johnson told German Chancellor Angela Markel that the nation is “ready to go without an EU trade deal”.

Follow me on Twitter @ZabelinDimitrifor updates on how geopolitical risks impact financial markets.

Wednesdays Asia-Pacific Trading Session

A relatively sparse data docket places the emphasis on macro-fundamental themes, namely the alarming medical metrics concerning the rising number of Covid-19 cases. AUD may continue to suffer after Victoria, Australias second most-populous state, announced a six-week lockdown amid a surge in Covid-19 cases.

Broader alarm about global growth prospects could harm commodity-linked FX like AUD and NZD but put a premium on anti-risk assets like the US Dollar and Japanese Yen. Concerns about solvency could lead to wider spreads on sovereign credit default swaps in Australia which in turn may amplify risk-off market dynamics.

AUD/JPY Outlook

The bricks laid down for the road to recovery for AUD/JPY may fall out from under the pair‘s feet despite a modest rise after breaking out of short-term descending resistance. Capitulation before the lower tier of the two-layered resistance range between 75.925 and 76.3320 could speak to an underlying lack of confidence in the pair’s upside potential.

The next few days may be critical in decoding how traders feel about AUD/JPYs prospects. A retest of frequently-tested support at 72.934 with a bounce could mean that the pair may end up trading sideways in the short-term. On the other hand, breaking below it and the floor at 71.894 could mark the beginning of a broader retreat.