FxWirePro: What drives AUD/JPY long portfolios?

The macro conditions are coming together to drive a pocket of JPY underperformance, albeit one that is likely to be limited in duration and magnitude, we’ve shown some significant driving forces:

1) We reckon that the Japanese investors would increase their unhedged foreign currency allocations early in the new FY given the relatively high nominal value of the yen and wider and more stable bond spreads,

2) The risk markets should be better cushioned in coming weeks from the stabilization in the global data surprise cycle and what our equity strategists expect to be a favourable earnings season (1Q’18 EPS at 21% oya vs. a consensus of 17%, and

3) Still low levels of FX volatility notwithstanding the pockets of instability in EM is conducive to short-term carry trade activity funded in JPY.

The US-Chinese trade frictions have caused AUD to notably underperform other high-beta currencies over the past month (-4% vs CAD and -2% vs NZD) which means AUD has potential to rerate from any de-escalation in this situation (the mere absence of fresh tit-for-tat measures may be sufficient to constitute a de-escalation).

Hence, buy AUDJPY at 83.86, stop at 82.10.

Currency Strength Index: FxWirePro's hourly AUD spot index is displaying shy above -14 levels (which is neutral), JPY is flashing at -12 (neutral) while articulating (at 12:13 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex

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