AUD/JPY: Geopolitics and central bank divergence driving force in the cross
|- AUD/JPY trades as a proxy to market risk and struggles on the upside.
- Eyes are on the yield spreads, with AU-US 10-year spread narrowing to -69.6b.
AUD/JPY is currently trading at 75.82, between a low of 75.77 and a high of 75.83, for the most part in consolidation following a rise in the Dollar which has lifted the crosses. The sentiment around the Dollar has turned slightly less negative on the interest rate differential front following the Nonfarm Payrolls data that came in better than expected overall.
This has seen markets to readjust and which are now pricing 29bp of easing at the July meeting (from 27bp at the start of the week and way into the mid-thirties before the jobs data). Yesterday, the US 2-year treasury yields had edged down to 1.84% in Sydney while 10-year yields ranged sideways between 2.01% and 2.04%. The overall impact has propped USD/JPY higher which has lifted the AUD/JPY cross when factoring in Aussie yields whereby 3yr yields rose from 0.93% to 0.95%, while 10yr yields rose from 1.33% to 1.35%.
"The curve held steady around 40bp. AU 10-year bonds continued to outperform that of the US, narrowing the AU-US 10-year spread to -69.6bp. Markets are pricing around 20% chance of a third cut at the RBA’s August meeting. A third cut, which would take the cash rate to 0.75%, is fully factored in by February 2020, with around 20% chance of a 4th cut in the cycle beyond that," analysts at Westpac explained.
However, looking ahead, market risk sentiment is set to remain as the Yen's predominant driver and the backdrop is not particularly favourable as the Trump administration continues to tighten the screws on the Iranian economy, as well as the Eurozone and China's over trade policy. AUD/JPY trades as a proxy to market risk and could come under pressure should tensions heighten on the geopolitical front.
AUD/JPY levels
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