AUD/JPY shows strength, but no recovery yet

Why I watch AUD/JPY

Since early in this crisis, there has been a powerful technical link between the AUD/JPY currency pair and the state of global markets. AUD/JPY has been a big carry trade (borrow Yen, buy Australian Dollars) and this probably explains why the currency pair correlates just about perfectly with global leveraging and deleveraging. When AUD/JPY goes up, everything worldwide rallies. When AUD/JPY goes down, everything declines. When AUD/JPY falls sharply, something is blowing up.

This can change any time of course, but so far the relationship holds. I am definitely not the only trader taking cues from this pair, because technical levels on the pair have proved repeatedly to be significant technical points in worldwide markets. For instance, the moment AUD/JPY declined below a clearly visible 2-year support level in September 2008, markets went into free fall. You must watch AUD/JPY.

Another currency pair that holds similar technical value is EUR/JPY.

Current AUD/JPY picture

The currency pair has staged a very sharp rally, just as worldwide stocks have rallied very sharply. What I'm looking at though is how the current level compares to the last few years. While this rally is strong, AUD/JPY has not yet reached 87 which was the technical level at which everything fell through the floor.

Here's an analogy

After two years of insane stamping on the floor and pushing the limits of the structure, we finally fell through the floor (87 on the chart). And we fell into a deep pit!

We are now making our first effort to climb up and out of the pit. Currently we are 70% of the way to ground level based on this technical tool... that's the point at which we can just barely poke our heads above ground.

This is a strong attempt at recovery, but it's not yet a recovery. We're 70% of the way to getting a breath of fresh air and the chance to stand on firm ground again. We are nowhere near the highs where we used to dance as the music played. (Citigroup's Charles Prince used to brag about dancing so long as the music kept playing.)

Very impressive rally though, also shocking to see everyone leverage-up again so soon as if nothing happened.

- Perpetual Bull