Japanese Yields Rise, Reducing the Appeal of Australian and New Zealand Dollars

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On Wednesday, Australian and New Zealand dollars suffered dramatic losses against the yen as rising Japanese yields threatened to extinguish the flows of capital that have traditionally been drawn towards the widespread carry trade.

The Australian and New Zealand dollar currencies have long been part of the widespread carry trade, which involves investors selling out of foreign currencies to purchase higher-yielding Japanese debt.

This strategy had become less attractive as yields in Japan had risen, as seen recently when the Bank of Japan (BOJ) badly wrong-footed a fragile market in the week before Christmas. As a result, the Aussie and Kiwi – two of the most liquid carry trades – were hit especially hard during this time.

The Australian Dollar (AUD) lost ground against the Japanese Yen on Wednesday, plunging 4.1% for its most significant single-session drop since mid-2016. This caused the Aussie to hit a nine-month low of 86.99 yen AUDJPY=R and destroyed crucial technical support at 90.79.

The New Zealand dollar (NZD) also tumbled overnight, losing 4% of its value to trade at 83.67 yen NZDJPY=R, a level not seen since late August. This represents a significant breach of the 200-day moving average held at 84.74, indicating a further weakening sentiment towards the currency.

“Yesterday’s BOJ tweak has been interpreted as putting the writing on the wall for a policy shift next year,” said Ray Attrill, head of FX strategy at NAB. “It also signifies a formal end to Japan’s tolerance/desirability of yen weakness.”

Japanese investors have the world’s largest hoard of foreign assets, and recent movements in Japanese yields have made it increasingly attractive to bring some of these funds back home. This process, known as repatriation, could have major implications for the currencies of countries such as Australia and New Zealand, which traditionally relied on being part of the popular carry trade.

Given current market conditions, Japanese investors have a powerful incentive to bring their foreign assets back home. This could spell trouble for Australia and New Zealand regarding currency markets over the next few months.

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