The Australian dollar initially dropped to 85.89 from 86.58 before rallying 111 pips to 87.00 after the Reserve Bank of Australia passed on cutting rates. Expectations were fairly high (around 60%) for the Bank to remain on hold as the labor market and business confidence remain strong. Arguments for a rate cut could return if we see weaker demand from China and lower inflation.
The AUD/JPY daily chart shown below displays the strong summer sell-off that coincided with collapsing commodity prices. The pair found major support at the 82.00 handle. Price has now made three higher highs and four higher lows. Price has been range bound between 85.50 and 88.50 for the past three weeks. Key support is currently at the 50-day SMA which is currently at the 85.71. If we continue to see the price rebound from here, we could see the bullish stance target the 90.50 zone. It is around that area that we could see price form a bearish butterfly pattern. If valid, we could see a reversal target the 100-day SMA.
If bearish momentum returns, we could see price find support in the 84.50 region. A break of the 82.00 barrier could open the door for a major drop towards the psychological 80.00 handle.
The trade: Buy AUDJPY at 85.50, with a stop loss at 84.50 and a take profit at 88.50. The risk/reward ratio is 1:3