With an undercurrent of volatility emerging to close last week as our backdrop, the Aussie Dollar / Yen pair opens the week looking ahead to a full slate of data releases between the two countries sprinkled throughout the week, which could provide more movement and a basis for a continuation of volatility.
In a general sense Chinese growth, rate differentials, and positive local economic data lately have all been constructive for Australian Dollar prices and with the confluence of a broadly experienced weakening in the Yen. We have seen this pair driven to a yearly high, although it has provided at times meaningful price action in either direction, and late last week, we saw a mild reversal off the yearly high.
The key question for this week is will the energy that fueled the pair last week remain, and could that energy supply moves in either direction as both currencies receive a variety of mixed signals? The rate differential alone between these two currencies means this pair often receives meaningful attention, and with monetary policy such a focus globally, that is certainly true right now.
The Royal Bank of Australia and The Bank of Japan and their messaging was in focus last week, but the Aussie also received a brisk gust of wind at its back earlier in the week from positive Chinese GDP figures, which is seen as bullish for Australia’s vast commodity producing sector. Both Bollinger Bands and an Average True Range indicator have been added to the chart below for additional context on the relative volatility in the pair.
The Bank of Japan is expected to continue to add volatility to Yen crosses over the near to medium term with an aggressively accommodative monetary policy at the same time as the economy is producing incrementally better growth numbers and equity markets are in range of all-time highs.
To establish an outlook for expected volatility for binary traders this week, we can look to a Generalized Auto Regressive Conditional Heteroskedasticity (GARCH) model. A GARCH model is an approach to estimate volatility in financial markets. The GARCH process is often preferred by financial market professionals because it provides more real-world context and forward looking insight than other forms when trying to predict the prices and rates of financial instruments. It can help inform our point of view in binary options markets when we are evaluating conditions for a volatility based trading strategy.
When looking at the results of a GARCH model for both the Aussie Dollar, and the Yen, we see a forecast for increased volatility for both currencies independently.
With a GARCH model providing an outlook for each pair increase in volatility on their own, the combined volatility of both should feed on what could be an eventful week.
As we open, a trader could expect this pair to search for direction following the events of last week. Following that, we will enter a mid-week period stacked deep with data including; Australian CPI on Wednesday and Japanese unemployment and CPI on Thursday.
Below is a look at the calendar of events that historically offer the potential for medium to high levels of volatility: