AUD/JPY recovers losses, but yield differential favors downside

• AUD/JPY has recovered early losses, currently trades above 100-day MA
• 10Y AU-Japan yield spread at 7-week lows, suggests a long lasting technical recovery in AUD/JPY is unlikely

An early dip below the upward sloping 100-day MA in AUD/JPY was short lived as sellers may be having a breather following the last week's 200-pip sell-off.

At the present time, the currency pair is trading around the 100-day MA level of 87.26. Despite the signs of bearish exhaustion, the technical recovery is struggling to gather pace. This could be due to the narrowing yield differential.

• 10Y Aussie-Japan yield spread fell to 265.7 basis points; the lowest level since Sep. 13.

Meanwhile, the one-month ATM volatility is showing signs of life. It seems to have bottomed out around 8.00 and currently stands at 8.20.

AUD/JPY Technical Levels

A break above 87.34 (1-hour 50-MA) would open up upside towards 87.58 (5-day MA) and 87.65 (July 24 low). On the lower side, breach of support at 87.00 (zero figure) could yield a sell-off to 86.56 (Sep. low) and 86.04 (50% Fib R of June low - Sep high).