COVID Fears Return

Another week winds down, bringing us just that bit closer to the end of the year. It’s been a week of uncertainty for most, given the return of COVID fears created by the Omicron variant. In markets, it’s been something of a tricky week as traders await further details on the new strain. This has created mostly choppy conditions, especially with the NFP sitting at the top of the week also. However, as always, there have been moves and there have been winners and losers. Talking with traders this week about the market action we’ve seen it seems the main focus has been on the more than 2% drop we’ve seen in AUDJPY. So, let’s take a look at what caused the move and, as ever, if you caught it? Well-done, if not? There’s always next week!

What Caused the Move?

The almost 200 pip drop in AUDJPY this week was a very clear cut move in response to the current news-flow we are seeing around the new COVID variant. Given AUD’s status as a risk currency (tied to commodity prices and global trade) and JPY’s safe-haven status (used as a store of value during times of uncertainty), AUDJPY was all but guaranteed to sell-off this week. In fact, the pair is often a great barometer for overall risk sentiment in the market as a result of the divergence between the two currencies.

AUD Lower On Risk Aversion

So, with risk assets under pressure this week over fresh COVID fears, AUD was seen trading lower. Fears that the virus will lead to a fresh global wave and, most importantly, potentially require a return to nation-wide lockdowns, has been a big blow to risk sentiment. Although the initial knee-jerk sell-off in risk assets has mostly abated for now, there is still the risk that should scientists confirm that the variant is more deadly than previous strains, selling will pick up pace again. While this uncertainty remains, AUD is likely to remain under pressure near term.

JPY Safe Haven Demand

Similarly, this same uncertainty which is weighing on risk assets is instead driving demand into JPY as a result of safe-haven inflows. Given that the Fed recently began tapering and is expected to continue tightening, it seems that JPY is a preferred safe haven destination, over gold, currently, which is adding extra support. Again, unless there is a big shift in narrative around the new COVID variant, this dynamic is likely to continue, keeping AUDJPY under pressure near term.

Technical Views

AUDJPY

The sell-off in AUDJPY has seen the market breaking down below the 80.69 level this week. With both MACD and RSI firmly bearish, and with the retail community holding an almost 70% long position, there is plenty of room for the current sell off to continue towards 79.57 and 78.44 beyond.