ECONOMETER

Against the backdrop of concerns about Chinese growth and a weaker path for China’s currency, the AUD has failed to make any headway over recent days. Perhaps more interesting is the fact that AUD remains one of the best performing currencies despite such concerns. From a positioning perspective the market is still net short AUD, albeit less so over recent weeks, implying that there is still scope for short covering.

The rally in commodity prices over recent days will likely have helped the AUD but notably it’s the wrong commodities that are rallying. For instance, iron ore prices have dropped sharply. Nonetheless, improving risk appetite is giving AUD some relief and downside risks to the currency remain limited, with its resilience set to continue. Consequently AUD/USD is set to see strong buying interest on any dip to technical support around 0.927.

USD/JPY has been range bound over recent sessions failing to make any significant headway above the 102.50 level. The consolidation in US Treasury yields is a factor capping gains in USD/JPY but an improvement in risk appetite and gains in Japanese equity markets will likely help fuel some downside risks for JPY over the near term.

There are also signs that after several weeks of net inflows, Japan is finally beginning to register renewed outflows of portfolio capital which ought to add further downward pressure on the JPY. The fact that the speculative market remains net short JPY may limit the pace of JPY depreciation, however. It is difficult to see JPY volatility decline further from already very low levels but a break of current ranges may require a bigger move in US Treasury yields. We remain long USD/JPY at 102.39.