The AUD/JPY currency pair is setting up for a medium to high-conviction long trade. With Australia showing signs of steady growth and stable inflation while Japan remains weighed down by low growth and rising inflation pressures, the macroeconomic backdrop supports a bullish outlook for the Australian dollar against the yen. Sentiment and technical indicators further strengthen this view, offering a compelling opportunity to capitalise on this divergence.

Fundamental Analysis

Australia’s economic performance continues to improve, supported by stable inflation and moderate GDP growth, making the Australian dollar an attractive currency relative to the Japanese yen.

Australian GDP growth improved to 0.3% in the last quarter, reflecting gradual economic recovery. Inflation remains stable at 2%, which provides the Reserve Bank of Australia (RBA) with the flexibility to maintain its policy without overly tightening financial conditions. Meanwhile, Manufacturing PMI stands at 50.2, indicating a return to expansion after several months of weaker performance.

Japan, on the other hand, is struggling with low annualised GDP growth of 0.5%. Inflation has risen to 3.6%, putting pressure on the Bank of Japan to reconsider its ultra-loose monetary policy. However, Japan’s central bank has shown little inclination to tighten, leaving the yen vulnerable to weakening against currencies with stronger growth and higher interest rates, such as the Australian dollar.

The interest rate differential between Australia and Japan remains a significant driver of AUD/JPY. The RBA’s benchmark rate of 4.35% contrasts sharply with Japan’s near-zero rate of 0.5%, further supporting the bullish case for the Australian dollar.

Sentiment Analysis

Recent sentiment trends also favour a long AUD/JPY trade. The latest Commitments of Traders (COT) report shows increasing bullish sentiment towards the Australian dollar as traders respond to improving growth and stable inflation.

In contrast, sentiment for the yen remains mixed. Although some traders see rising inflation as a potential trigger for tighter monetary policy, the Bank of Japan’s reluctance to act decisively has kept broader market sentiment towards the yen cautious.

Global risk sentiment is another key factor. AUD tends to perform well in risk-on environments, while JPY is typically seen as a safe-haven currency. With risk sentiment improving, traders are shifting towards higher-yielding currencies like the Australian dollar.

Technical Analysis

Ichimoku Cloud Analysis:
The AUD/JPY chart shows the price is at a critical juncture near the upper boundary of the Kumo (cloud). A decisive break above the cloud would confirm a bullish breakout and signal the start of a stronger upward trend.

The Tenkan-Sen (Conversion Line) has already crossed above the Kijun-Sen (Base Line), providing an early bullish signal. Meanwhile, the Lagging Span (Chikou Span) is approaching the price action. A clear breakout above the cloud will confirm the long-term bullish momentum.

Price Action Analysis:
Recent price action suggests increasing bullish momentum. The pair has formed a series of higher lows, signalling strong buying interest. The current price level is testing the 96.80–97.00 resistance zone, and a breakout above this area could lead to a sustained rally towards 98.50 and beyond.

Candlestick Analysis:
Bullish candlestick patterns, such as bullish engulfing candles and morning star formations, have appeared at key support levels, indicating strong buying pressure. Recent candles show shrinking wicks on the downside, reflecting that sellers are losing control.

MACD and RSI:
The MACD indicator shows a bullish crossover, with the histogram turning positive, indicating growing upward momentum. The RSI stands at 50.47, which is neutral but leaning bullish, providing further confirmation of potential upside without the risk of an overbought condition.

Conclusion

The AUD/JPY long trade is a medium to high-conviction opportunity, driven by favourable macroeconomic conditions, improving sentiment towards the Australian dollar, and bullish technical signals. The Australian economy’s stable growth and interest rate advantage over Japan create a strong foundation for AUD strength, while Japan’s economic challenges continue to weigh on the yen.

Traders should monitor the price action closely for a confirmed breakout above the Kumo and the 96.80–97.00 resistance zone. If this breakout occurs, AUD/JPY could rally towards 98.50 and higher, offering a great opportunity to capitalise on the economic divergence between Australia and Japan.

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