Risk reset: AUD/JPY clocks two-month high

Risk is back following Trump’s U-turn on ‘One China’ policy and his realistic approach while dealing with Japan’s Abe. Strong China data released last week and heightened odds of tax cuts in the US are like ‘icing on the cake’ for the risky assets.

The risk-on is best represented by the AUD/JPY cross, which hit a two-month high of 87.49 this Monday morning.

President Trump did not discuss exchange rate with PM Abe and did not demand a bilateral trade deal. He also agreed last week to honor the ‘One China’ policy and promised to deliver a major tax reform in a few weeks.

All the Trump related news flow has been risk positive, thus the Aussie dollar is on the run. Meanwhile, the Japanese Yen, a funding currency, is being offered across the board. A weaker-than-expected Japanese GDP figure released earlier today failed to have a meaningful impact on the markets.

The cross remains at the mercy of the broader market sentiment and US-Japan bond yield spread, given the US economic calendar is light.

AUD/JPY Technical Levels

The cross was last seen trading around 87.40. A break above 87.53 (Dec 15 high) would expose 88.21 (Dec 30, 2015 high), above which the psychological level of 89.00 could be put to test. On the downside, the session low of 87.06 could offer support, which, if breached would shift risk in favor of a re-test of 86.38 (5-DMA) and 86.17 (10-DMA) levels.