USD/JPY retraced lower as politicians grappled with the nominees for Bank of Japan board positions. The slight pull back in USD/JPY yesterday was attributed to the opposition of candidate Iwata for post of deputy governor and implications for less dovish monetary policy. The reality is that it’s not really politics driving USD/JPY but rather yield differentials (once again).
Indeed the pull back in USD/JPY is explained by the small drop in US yields over the last few days. The relationship suggests that the chances of a deeper pull back in USD/JPY are limited unless US Treasury yields drop sharply relative to JGBs. This looks unlikely but it will depend as much on US economic data as Japanese monetary policy measures. USD/JPY will see strong support around 94.77 on any pullback.
AUD has made an impressive recovery against both the USD and NZD over March and looks set to extend gains over coming weeks. The strong employment report in February which revealed a 71.5k increase in jobs has provided a further boost to the currency. The move in AUD is particularly impressive given the generally strong USD environment over recent weeks and highlights the declining influence of USD index gyrations on the AUD.
The risk / reward of holding AUD has definitely improved, with speculative positioning in the currency dropping to a relatively low level (well below the three month average) while our quantitative model also points to upside risks for AUD/USD. Technically AUD/USD looks well supported around 1.0202, with resistance at 1.0400 (6 Feb high) likely to be tested over coming sessions. AUD/NZD also looks primed for more gains especially given economic fears related the drought in New Zealand.