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Exit AUD/JPY trade – Westpac

FXStreet (Barcelona) - Sean Callow of Westpac believes it is time to exit the long AUD/JPY trade, the pair has made strong gains since the BoJ boosted QE but in recent sessions has come under pressure as AUD has struggled with weak commodity prices.

Key Quotes

“Retail investors have sharply stepped up purchases of foreign assets. Today's BoJ move will add to that demand.” We argued that the BoJ’s increased QE (which equates to roughly $60bn per month) would, in combination with the ECB’s commitment to a balance sheet expansion that ultimately should total EUR1 trillion, increase demand for higher yielding, high rated currencies such as AUD”

“Indeed our view appears to be shared by the RBA Board, whose Nov minutes noted the potential for the BoJ decision and GPIF changes to “increase the size of capital outflows from Japan in pursuit of more attractive yields on various assets in Australia (along with other destinations). Such flows could hold the Australian dollar at a higher level than economic fundamentals would imply.””

“Shorter term however, AUD has mostly traded poorly during the ongoing waves of JPY decline, as Asian currencies have followed the yen and driven broad USD demand.”

“AUD is also struggling with ongoing weakness in iron ore prices, with price action since the China rate cut particularly disappointing. Note Westpac’s China data pulse index fell to a miserable 19.3% last week, a low since Sep 2012. To be sure, this does set the stage for an improvement in China data momentum, but this could take some weeks. We are now square AUD but remain long USD/JPY from 116.80.”

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