Marked by great fanfare and admiration, the implementation of negative interest rates in Japan has not had the intended impact as the price action of the subsequent trading would suggest. Despite the intention to weaken the Yen versus peers to help stoke inflation combined with actual intervention in exchange rates, the Bank of Japan has been largely unable to provoke sustained losses in the currency to help the export economy. With global trade growth still decelerating or shrinking in the case of Asia, policymakers view this strategy as the only shot at helping to insulate the economy and protect export market share. For AUDJPY, the pair has continued to accelerate lower as Australian policymakers maintain their accommodative stance in light of a deteriorating global backdrop in a bid to keep the domestic economy insulated.

Fundamentally Speaking

The abject failure of Japanese monetary policy combined with rising financial market volatility has led to an exodus from carry trades across the board. This move away from chasing after yield has seen a major impact in the USDJPY carry trade in particular, although the AUDJPY pair has not been immune, especially with Australian interest rates substantially higher than comparable Japanese levels. The Reserve Bank of Australia has opted to leave interest rates at 2.00% since May versus the Bank of Japan which brought rates to -0.10% in the latest meeting. Although these conditions make for an ideal carry funding trade, rising volatility and concerns about liquidity have seen a sharp unwind in the trade. Despite the massive amount of stimulus implemented, JPY refuses to fall even though conventional wisdom would argue to the contrary.

After hitting the lowest levels since 2012 earlier in the month, the AUDJPY has bounced back modestly, however, prevailing fundamental themes have not let up. Policymakers in Australia continue to maintain their accommodative outlook, with forecasts currently expecting an additional 25 basis cut to the key rate in the second quarter of the year. With this factors in mind combined with the Bank of Japan monitoring the results of its own activities, the pressure on the Australian dollar will remain intact, especially if there is no demonstrable rebound in commodity prices. While the local economy has been helped by lower rates which have buoyed the housing sector and consumption alongside inflation, should trade measures not improve, policy will further reflect market anxiety, adding to downside risks.