Morning Brief – Thursday 23rd

AUDJPY

From the title you might think well, I don’t trade Aussie Dollars, come to think of it I’ve never been there in my life. Similarly, I’ve never had a Japanese Yen to my name, why on earth would I consider the exchange rate between the currencies of these two countries that are at least eight hours away from my time zone?! Well, the answer is because the golden compass of the AUDJPY exchange rate can help you make some serious decisions on your GBP, EUR and USD, and come to think of it most accumulations of foreign currencies.

In the investing world, these two currencies are the antithesis of each other; matter and anti-matter. With Australia’s Dollar a “high-beta” currency, moving dramatically on sentiment and external conditions, the Japanese Yen is one of the world’s most famous safe havens: a harbour investors seek cover within during a storm. When matter meets antimatter the two cease to exist in a fleeting moment, emitting energy usually in the form of radiation. Fortunately, we don’t need particle physics to explain what happens when the Aussie meets the Yen.

One Aussie Dollar is currently worth just shy of 76 Japanese Yen, equalling the lows of the beginning of 2019, a level hit following one of the worst stock market sell offs at the end of 2018. As risk settled and trade optimism continued, the Japanese Yen’s astronomic appreciation eased and the Aussie Dollar managed to gain traction creating a technical price floor around this level. To add to the pressure, 76 is also the level that the pair threatened in January 2016 before staging a similar recovery.

The trade links between Australia and China are critical to both economies. China imports huge quantities of Iron Ore, for example, from the commodity focused nation. Intensifications of the trade war that threaten Chinese production and growth therefore weigh heavily on the Aussie Dollar as expectations grow of lower future Australian exports. Combine this specific risk with the status of the Yen as a safe haven and it’s particle physics on a global scale.

Sub-76 Yen to the Dollar is a pivotal level that at least thanks to the surprise election result over the weekend down-under, has not been convincingly broken yet. If the pair’s bearish trend continues it will flash warning signals to the rest of the world with huge ramifications on global assets.

Citigroup Inc., Oanda Asia Pacific Pte and JPMorgan Asset Management representatives have all strongly suggested the pair will break this level spurring concerns in wider markets. Options markets too are pricing the strongest polarised expectations amongst G10 currencies, with the Yen priced as the G-10 currency most likely to appreciate in value, and AUD the currency most likely to sell off.

So if these major market participants are right, which they really could be, and options markets are onto something, then there’ll definitely be some spare cash to stick another shrimp on the barbie if you find yourself kicking around Sydney!

However, what for the rest of the world?

The pair is a barometer of economic health and its deterioration would cause stock sell offs in a bid for safe havens. In Foreign Exchange markets, the Pound has achieved a more risky status as a result of its political tumult surrounding the Brexit saga. It has also proved sensitive to risk appetite changing as a result of trade war developments. So expect a weaker Pound (all other things on the Brexit/economic front being equal) should AUDJPY break below its present market value. The US Dollar has struggled as a safe haven as of late late, however, with its status as the underwriter of international trade it is unlikely to be moved immensely. US treasuries now trade a long way away from their >3% yield enjoyed at the start of 2019 on the 10-year note. A further rally in US debt, a classic safe haven, would limit reward behind USD thereby stunting investor demand for it introducing a downward pressure on the currency.

The Euro, much to many commentators’ surprise, is showing itself as an emerging safe haven. However, unabating political risk and economic stagnation is hindering its ability to achieve a bid as a result of intensifications in global risks. Conversely, if the 76 level is held, a signal of confidence in the global economy and trade war would be generated, raising the Pound, whilst undermining defensive asset demand.

Don’t own a Yen; don’t need a Dollar, Dollar, Dollar isn’t what you need? Well, there’s your reason to watch BOTH. (Hey, hey.)

Discussion and Analysis by Charles Porter

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