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Exit AUD/JPY trade - Westpac

FXStreet (Guatemala) - Sean Callow, analyst at Westpac Banking Corporation ABN explained that when the Bank of Japan boosted its QE program on 31 October, we opened a long AUD/JPY position at 98.00.

Key Quotes:

“Amid the extension of the pair this month, we raised the stop loss order into the money. In today’s AUD selloff our order was hit at AUD/JPY 101.15, locking in a 3.2% gain”.

“As Rob discussed on the day of the BoJ surprise (“AUD/JPY - To push towards 2013 highs?”, 31 Oct), “we were already seeing very clear signs of a sharp shift in Japanese risk sentiment”.

“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”.

“We see no reason to change this view on a multi-month/quarter basis. 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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