The decline starting from 3rd Dec 2018 looks like it is completed. There was a 3-wave movement in the process. The first wave started from 83.89 to a low of 70.54. That was followed by a three and a half month correction that reached a high of 80.58, which was also the Fibonacci 62% correction point of the previous decline. Starting from 80.58, price reached a low of 69.94. It took another four months to reach the low. Using Fibonacci projection from 83.89 to 75.23, the Fibonacci 161.8% projection point comes in at 69.85, which was just below the low reached.
MACD had a bullish divergence when price reached a low of 69.94, which was a warning of a potential price low. MACD has since turned bullish and is rising, hinting of a price rally in the future. While Stochastic is in the overbought zone, there is still a chance price could move higher. Today, price move above the high in between the two lows (69.94 & 71.72), triggering an Ichimoku reversal pattern in the process. If price is able to stay above 74.46, we could see price moving to 77.50 according to the Ichimoku V price projection target. There were previous price supports at 77.58, which could now turn into a resistance area.
Beijing and Washington both said there were “close to finalizing” a first stage agreement to scale back their trade war, which should be a good for the Aussie but bad for the yen. Trade war has slowed down the Chinese economy which had led to lesser sales from Australia to China in raw materials. A possible trade deal could improve the Chinese economy, leading to improved raw materials purchases from China. The Japanese Yen is a safe haven and given the improved Sino-US trade relationship, there could be less risk and less demand for safe haven Yen.
Aussie interest rate is higher than that of the Japanese Yen. A higher interest rate is usually beneficial to the currency with a higher interest rate compared to the other. RBA could be on hold at the moment, keeping interest rate on hold which should maintain the interest rate differential in the Aussie’s dollar favour. Japan’s inflation is low and is not up to BOJ’s target level. Japan’s interest rate is likely to stay low or negative until inflation picked up. All these point to interest rate differential in favour of the Aussie dollar.
Price may have risen from the low but we think there are more upside potentials. We would recommend a buy at 74.50 for a price movement to 77.50 with a stop below 72.90. We expect price to test 76.10 by the end of the year and to reach 77.50 target by the first quarter of 2020.