JPY, AUD and Asian FX

Risk appetite remains relatively well supported, with US and Asian equities edging higher and the VIX ‘fear gauge’ moving lower. There is a lack of first tier data releases today, with only German and UK CPI inflation data on tap as well as the US NFIB small business optimism index. Attention will instead centre on various Fed and ECB speakers for further policy clues.

Indeed, markets will look for any hints of reinforced forward guidance by ECB speakers and further insight into the timing of tapering from Fed officials. ECB speakers include Angeloni, Weidmann, Nowotny and Asmussen while Kocherlakota and Lockhart are scheduled to speak from the Fed. There will also be plenty of interest in speeches by the Fed’s Yellen and Bernanke on Thursday.

The JPY appears to be finally succumbing to the pressure of a generally firmer USD and higher US yields although the currency has yet to break out of its recent ranges and correlations suggest that the JPY has not been as sensitive as other currencies to either factor. I remain bearish on the JPY.

While the JPY has not been as sensitive as other currencies to yield lately it has still faced some pressure and will continue to do so if we are correct in our view that US yields will push even higher against Japanese JGBs. Firmer US data has helped to shift expectations of Fed tapering to around December or January. In contrast the BoJ is showing no sign of pulling back from its balance sheet expansion and in our view could even extend asset purchases next year in order to sustain its inflation around its 2% inflation target. This remains a recipe for more USD/JPY upside.

Having rallied by around 9% since its end August low AUD has been unable to hold onto gains. Fortunately for AUD the recent rise in Australian bond yields has acted to mitigate against some of the potential pressure from rising US bond yields; since the USD began its recent rally around 28 October Australia’s yield advantage has narrowed by only 3 basis points. However, the strengthening in the USD has wreaked havoc on many currencies and the AUD has not escaped.

While AUD may face headwinds from a firmer USD, Australia’s relative yield attraction will give it some scope for recovery into year end. Indeed, if yield appetite continues to strengthen in an environment of improving risk appetite and low volatility AUD should prove to be a key beneficiary. In the near term AUD/USD will find some technical support around 0.9280.

Asian currencies have gained a little respite from general USD strength but remain vulnerable to a stronger USD over the coming weeks. Deficit currencies have renewed their position as the biggest underperformers over recent weeks, with the IDR and INR under most pressure followed by MYR. The least vulnerable to USD strength and higher US yields are North East Asian currencies especially TWD and KRW.

Reflecting renewed tapering fears most Asian countries have experienced renewed equity portfolio outflows month to date. The RMB continues to buck the trend although its relative strength may reflect the timing of China’s 3rd plenum which ends today.

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