ANZ: Japanese investors may be about to unwind their bullish Australian dollar bets

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On the back of Australian dollar weakness and potential Japanese yen strength, the AUD/JPY is looking increasingly vulnerable to any spike in volatility and is at risk of forging a new, lower range.

So says ANZ’s Daniel Been, who believes that a combination of the two, combined with souring market sentiment, weakness across stocks, high-yield debt and emerging markets should see highly-volatile FX pairs, such as the AUD/JPY, follow suit.

Here’s Been:

“AUD/JPY is teetering around 90 despite the recent decline in volatility and the slight improvement that we saw in risk sentiment in the wake of the recovery in Chinese stocks and the thawing of relations in Europe. The inability of this cross to bounce in recent weeks is telling and underscores the fact that AUD is looking increasingly vulnerable to deterioration in sentiment.

We think that AUD/JPY is becoming an increasingly important driver of the AUD as Japanese real money and insurance accounts remain one of the largest remaining long positions in the market and we believe this positioning could come under some pressure in the near term”.

Been believes that with other risk-sensitive assets starting to look fragile and low levels of market volatility prevailing, the AUD/JPY looks particularly vulnerable given that it sits at the bottom of its recent trading range. Should Japanese real money investors begin to unwind their long Australian dollar bets, something Been believes are “one of the largest remaining long positions in the market”, the pair could come under some pressure in the short-term.

He is looking for the pair to fall to 85.0 in the period ahead. Currently the Australian dollar buys 89.6 Japanese yen.

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