Westpac: The Aussie dollar is heading to 72 cents as Japanese buyers desert it

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Westpac has reinforced its view that the Aussie dollar is going to end the year in the 72-73 cent region against the USD.

Besides the terms of trade fall dragging the Aussie lower Westpac’s head of market strategy, Rob Rennie, says he’s picked up a change in the behaviour of Japanese investors which “adds weight to rising downside risks” given that “demand for the A$ appears to be softening” from Japan.

“Years of watching the ebb and flow of Japanese demand has told me at times the mythical Mrs Watanabe can be an important source of demand for the A$ in difficult times; in other times she can be an important source of supply,” Rennie said in a note to clients this afternoon.

Rennie says that Japanese investors are “showing increasing signs of sensitivity to both the level and rate of change in AUD/JPY.” That means that as the USD/JPY weakens, dragging the AUD/JPY rate higher, that demand to buy Aussie and sell Yen is falling.

Now, there is no way of knowing when the price is low or high in the eyes of Japanese investors. However, our own liaison work on recent trips to Japan very much confirm recent behaviour – Japanese real money investors currently see AUD/JPY as cheap at 90 and below and expensive at 98/100. At current levels, i.e. 95/96, we are closer to the upper end of the range. That would be consistent with reduced demand for the A$ in recent weeks and the last month or so and likely going forward.

Rennie and his colleagues think that the Aussie is going to remain “sticky in the current low yield world with iron ore undergoing a structural short squeeze.” But he doesn’t think the short squeeze can last with supply forcing iron ore prices lower again later this year.

But it’s a general market malaise that Rennie believes is going to add to Mrs Watanabe’s natural cautiousness and see the buyers disappear. Rennie believes that “rising/volatile bond yields and steepening curves with central banks struggling to manage rate cycles, market expectations and signs of bubbles in asset markets” are all going to weigh.

That means he’s targetting the 72-73 region by the end of the year.

The good news for the economy in Rennie’s forecast is that 5 cents is a decent fall from where the Aussie sits this afternoon at 0.7719. So the overall economy should get a shot in the arm. That’s the news the RBA will be looking for.

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