SYDNEY: The Australian and New Zealand dollars extended their meteoric ascent on the yen on Monday, as the Bank of Japan acted to keep domestic bond yields near zero even as Antipodean yields surged to multi-year peaks.
The BOJ’s offer to buy as much bonds as needed to keep yields down bucked the trend toward tightening in most of the rest of the developed world.
The gulf in yields has seen funds flood out of the yen in search of higher returns, lifting the Aussie to its highest since mid-2015 at 92.52 yen.
The Aussie was now up 10.5% for the month in its best performance in a decade.
The flow of cash combined with high commodity prices to also get the Aussie up to $0.7519, a gain on the month so far of 3.5%. Next stop is the high from last October at $0.7555.
The kiwi dollar was not far behind with a rise of 9.7% on the month to 85.44 yen. It reached $0.6950 on the US dollar for a gain of 2.6%.
Australia, NZ dollars in buoyant mood as funds flow out of yen
Alan Ruskin, macro strategist at Deutsche Bank, argues there is a major re-rating of AUDJPY underway to reflect the diverging outlooks for rates and the terms of trade.
While markets see no move at all in Japanese rates for years, they imply Australian rates will rise from 0.1% to at least 1.75% this year and to near 3% by the middle of next. Australian 10-year bond yields have risen almost 70 basis points this month alone to reach 2.86%, while Japanese yields stayed around 0.24%.
At the same time, supply disruptions are expected to keep the price of Australian commodities high for an extended period, a major drag for Japan which is a net importer of resources.
This in turn had seen Australia turn decades of current account deficit into a run of surpluses.
“Australia is now running an underlying narrow basic balance approaching 5% of GDP, while Japan’s narrow basic balance is seen shrinking to near zero at current energy prices,” said Ruskin, referring to the combined balance on the current and capital accounts.
“An Aussie re-rating is then warranted on the external accounts alone. Welcome AUD/JPY to this brave new world.”
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