December 28, 2021 11:32:49

The holiday period is a traditionally low-volatility period for FX, even as the Santa rally in equities plays out. The broader market tone is constructive, guided by generally positive Omicron headlines. This is seeing the safe haven yen underperform while seasonal tendencies look to be kicking in as the dollar struggles to find a conclusive bid against the rest of the G10 currencies. Meanwhile, the aussie continues to make gains and is the leading major in December.

We wrote at the start of the month about AUD/JPY traditionally being seen as a FX “risk gauge”. The classic safe haven yen currency is paired with the risk sensitive aussie. That said, we do note that the strong positive correlation with the S&P500 has decoupled this year with the non-stop rise in US equity markets.

AUD/JPY moves above 200-day SMA

Technically, the risk on/risk off pair has rebounded strongly in December after being oversold on the daily RSI and after trading progressively down through the lower Keltner band. But prices tracked sideways in the middle of the month capped by long-term trendline support/resistance from the March 2020 low.

Another leg higher has taken the pair through that long-term upward trendline and the 50% retracement level of the October/December move at 82.51. This week, bulls have also pushed past the 200-day SMA at 82.64 which will act as support, along with the 50-day SMA at 82.80. The next upside targets and Fib levels are 83.40 and then 84.65 if the risk rally continues into the new year.