AUD/JPY remains positively correlated to risk appetite – Westpac

Sean Callow, Research Analyst at Westpac, notes that AUD/JPY has chopped lower since June, falling to lows dating to US Election Day in Nov 2016, but price action has mostly not been dramatic, with the yen finding only modest safe haven demand on episodes of market turbulence such as the Turkey meltdown.

Key Quotes

“The yen’s limited sensitivity to bouts of risk aversion is evident in the fact that USD/JPY has not closed below 110 since the June FOMC & ECB meetings which cemented the US dollar’s yield advantage.”

“AUD/JPY remains positively correlated to risk appetite but most of the movement lately has been AUD-specific.”

“AUD looks to have been undermined over the past month by emerging market strains (including in Asia), ongoing US-China trade tensions and unexpected local political volatility.”

“The RBA outlook hasn’t really changed for some time, the bank remaining upbeat on economic growth medium term and stressing patience on below target inflation. The Bank of Japan meanwhile is allowing wider ranges on JGB yields but the pace of bond purchases is ticking up again.”

“This month’s plentiful risk events suggests it is too soon to call a low in AUD/JPY. But with commodity prices suggesting AUD is undervalued, trade under 79.00 should be short-lived.”