The bulk of the action in the forex market today is once again concentrated in the Australian dollar, which dropped on weaker employment numbers only to recover on Chinese trade data that showed imports rising 10.9%. Australia feeds China’s thirst for iron ore and relies on its demand for growth. The volume of iron ore imported by China in July was the largest this year, which is a very good sign for Australia’s economic outlook. Traders should expect the volatility in the AUD and Aussie related pairs to continue for the next 24 hours with Chinese inflation and industrial production numbers scheduled for release along with the RBA Statement on Monetary Policy.

However lost in the excitement of the big moves in AUD is the continued sell-off in USD/JPY. The currency pair has now fallen for the fifth consecutive trading day to its lowest level since June 16th. Although U.S. weekly jobless claims ticked up slightly from 328K to 333K, the absolute amount of claims is still low and consistent with an overall recovery in the labor market. While continuing claims also rose to 3.018 million from 2.951 million, the 4-week moving average dropped to its lowest level since November 2007. The data provided no help to USD/JPY, which quickly shrugged off a knee jerk rally.

Last night, the Bank of Japan left interest rates unchanged. They nudged up their expectations for inflation, saying that, “it appears to be rising as a whole” but did not officially alter their economic assessment. Comments from BoJ Governor Kuroda were more upbeat – he indicated that the downside risks as a whole have moderated to some extent in Europe and China. He also noted that income and spending conditions have improved. Japanese purchases of foreign bonds also hit its highest level since August 2010, which should have been negative for USD/JPY. Unfortunately the continued slide in the Nikkei and lack of upward momentum in U.S. yields has prevented USD/JPY from rallying.

From a technical perspective, there is no major support in USD/JPY until 95 and even then, beyond the psychological significance of this level, there is not much standing in the way of USD/JPY revisiting its June lows at 94. Aside from being a swing low, the 94-94.20 level coincides with the 38.2% Fibonacci retracement of the 2007 to 2011 sell-off that took the pair from a high of 124.15 to a low of 75.57. From a fundamental perspective, the reasons for buying USD/JPY including Fed tapering and BoJ easing remain intact but at this stage, we would prefer to wait for the currency pair to stabilize and start to turn higher before buying.

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