AUD/JPY remains bid and is working hard to break above 87.88 (50% Fib retracement of the Aug-Sep rally) even though the Reserve Bank of Australia (RBA) Financial Stability Review (FSR) warned that higher interest rates could hit heavily-indebted households.

The central bank said higher rates and weak income growth could see some highly indebted households struggle to service debt. It also talked about elevated risks in China due to high levels of debt, opaque borrowing.

The cautious tone has failed to weaken the Aussie. However, the Australia-Japan 10-year yield differential has narrowed from 275 basis points to 273 basis points, which suggests the gains in the Aussie could be short lived.

Focus on China data

China September trade balance data is scheduled for release at 0200GMT. An uptick in the trade surplus and imports of commodities could lift the Aussie dollar and other commodity currencies.

AUD/JPY Technical Levels

The pair was last seen trading around 87.90 levels. A break above 88.00 (zero levels) would expose 88.45 (38.2% Fib R of Aug-Sep rally) and 88.74 (Oct 5 high). On the downside, breach of support at 87.76 (session low) would open up downside towards 87.60 (50-DMA) and 87.25 (Oct 10 low).


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