From ANZ's weekly strategy client note
Firstly, on the Reserve Bank of Australia (bolding mine):
- The tone in the RBA debate has shifted a touch, although not as much as the sell-off in the front end would suggest. The bounce in auction clearance rates in Sydney and Melbourne, combined with a more hawkish Statement on the Conduct of Monetary Policy, suggests the chances of a near term cut has receded. That said, a weak Q3 inflation print would quickly see sentiment shift.
Their FX KEY POINT:
- A deeper look at the global policy announcements this week will highlight that the pushback above USD0.76 is unjustified. Global political risks bear close watching, while the improved Australian domestic situation looks well priced in
AUD VALUATION AND INDICATORS
- The underlying drivers of fair value for the AUD consolidated at reasonable levels. In particular, the recent widening in the front end has been notable. Looking ahead, we do not think this widening can besustained. With the RBA now very conservatively priced for further easing and the Fed meeting out of the way, risks suggest the spread could narrow again and remove some support from the AUD.
- Given that interest rates have fallen out of focus as adriver of the AUD, we are alert to investors refocusingon the market. Until then, risk sentiment remains in control.
ANZ are looking for a lower AUD/JPY:
- Given the policy set announced by the BoJ this week, we think that a test below 100 for JPY is possible, and that likely means that AUD/JPY is set to test lower as well.
- Of particular importance for this cross will be the reaction of Japanese investors to a steeper yield curve and positive yields at the long end.
- We already felt that the carry on offer in AUD was not sufficient to offset the currency risk that Japanese investors needed to take. A rise in JPY yields could mean that Japanese appetite for foreign bonds wanes somewhat. This would take a leg of support away from currencies like the AUD.
