Aussie to remain strong as commodity prices firm up

On Wednesday, the Bank of Japan took an arguably unexpected path to weaken the Yen. Having been aware of the fact that the market will buy the Yen if the interest rate is sent further deep into the negative territory, the BoJ turned its focus on the long-term interest rates.

The BoJ held to the negative interest rate of -0.1%, but abandoned the process of flushing the market with newly printed money. Instead, the central bank announced its plans to purchase bonds with long-term maturity to maintain a yield of about 0%. The process is expected to steadily weaken the Yen against other major currencies including the Aussie dollar. There are few more important factors which continue to keep the Australian dollar as the blue-eyed boy among the investors.

The Australian benchmark interest rate currently stands at 1.5%, which is high enough to attract investors across the globe. The investors have little option as of now. The zero interest rate in the EU, 0.25% interest rate in the UK, -0.1% interest rate in Japan, and 0.5% interest rate in the US has forced the investors to look at riskier assets.

Bloomberg

On the positive side, the Australian economy is still in a far better shape than the EU countries. The price of iron ore continues to hover around $55 per ton. Even though the market expects oversupply of 50 million tons next year, the effect is yet to be seen on the price. Likewise, the price of coking coal, the major ingredient used by the steel industry, has risen to a four year high of $205 per ton.

The efforts taken by China to curb oversupply and the decline in the production due to heavy flood in the Queensland region of Australia have largely contributed to the price rise. Coal is the second largest export commodity of Australia. Finally, in the US, the increase in the demand for natural gas due to the above-average hot weather extending well into fall have resulted in a surge in the natural gas price to $3.047 a million British thermal units on the NYMEX (New York Mercantile Exchange). The recorded price is the highest since Jan 2015.

Since July 2013, the unemployment rate of 5.6% in August is the lowest in Australia. The housing market continues to remain buoyant. All these factors indicate that the Aussie would fundamentally remain strong against the Japanese Yen in the short-term.

Technically, the AUD/JPY pair is consolidating at 76 levels for the past five months. The rising MACD and momentum indicators make us believe that the currency pair will begin trending upwards.

Thus, a long position can be taken in the AUD/JPY pair near 76.70. To minimize the risk arising out of speculation, a stop loss order should be placed below 75.70. The profit for the suggested trade can be taken at or below 78.20.

To make money out of the probable uptrend of the AUD/JPY pair, a binary trader can buy a one touch call option as long as the target level is below 78.20. The trader should also negotiate for a contract expiry date in the third week of October.

---