Aussie dollar up; markets eye Bank of Japan

The Australian dollar has underperformed the Euro move with a 0.10% gain but reclaimed the 74cent region it lost yesterday. It’s at 0.7408 this morning with the bulls thankful no doubt and pleased there's been a consolidation in the CNH AND CNY. 

That AUDUSD has underperformed the Euro’s move is understandable given the funk in equity markets in the US and across the globe in the past 24 hours. But that it rose back above 74 cents despite this is a testament to the heavy load the shorts are carrying in the Aussie and the longs are burdened with in the US dollar overall. 

Where to next is an interesting question.

But I found it instructive that the turn in mining and metals shares relative to the overall market suggests some support for the AUDUSD on an outright basis. Also, I saw a comment from Westpac’s Rob Rennie who said: “theaverage of fair value forecasts” for the AUDUSD at the moment sits at 75 cents. Exports and sentiment are supportive, but the yield differential is a drag and “at lows back to July 2000”.

That was an awful time for the Aussie dollar and it remained under pressure until the low in April 2001 when it fell to about 0.4775.

It’s a good example that there is no one simple or single factor which drives currency markets – its why they are so hard but so much fun. And I raise Rob's comment on the interest rate differential, and his thoughts on the other fair value drivers and models, to highlight that point.

For the moment this is as much about the battle over the Chinese Yuan and the USD itself with the Euro as it is about the Aussie dollar.

Indeed, the Aussie is almost a residual of the bigger moves and swings in sentiment. And that means if the Yuan stabilises, if the Euro can break 1.1730/50, and if USD longs get spooked the Aussie can rally. May be not today but the pressure is building.

And speaking of today, the AUDUSD is right in the middle of its Bollinger bands at the moment. Very short term a dip below 0.7397 might see it back at 0.7380 while resistance is 0.7427 and then 50.

Japanese Yen

It’s a big day for USDJPY traders today as we await the announcement from the Bank of Japan (BoJ).

After retail sales yesterday were much better than expected with a lift of 1.5% you have to wonder if the BoJ might make some sort of change given the economy does seem to be healing and the BoJ is running into constraints on the effective execution of its policy.

But will there be any policy changes, any indications that the bank is readying to alter the anchor rate for 10-year bonds, and ETF purchases? Most likely it is the later with expectations that the BoJ will switch from Nikkei buying to Topix buying. But there is also an expectation that the bank will downgrade the inflation outlook after an extended period of undershooting it.

That’s despite signs that the economy is looking in better shape and that wages are rising.

So the wash up is it’s probably too early for a material change in BoJ policy with regard to bonds. That’s certainly the case given the BoJ was in buying 10 year JGB’s for the third time in a week yesterday and actually got hit with a decent – at least much larger – amount of bonds than previous operations.

Thus, it would be a surprise if there is a surprise given kites have been flown and market reaction tested.