Australia, NZ dollars hit 7-year highs against yen as trade and yields combine

SYDNEY: The Australian and New Zealand dollars shot to seven-year highs against a sinking Japanese yen on Wednesday as major shifts in trade flows and bond yields favoured the resource-heavy currencies.

Such was the exodus of cash from the yen that it helped the Aussie stabilise on its US counterpart after a run of losses, leaving it 0.4% firmer at $0.7401.

The kiwi also got a reprieve, gaining 0.2% to $0.6749 and edging away from a seven-week low of $0.6717.

Against the yen, the only way was up as the Aussie rose 0.7% to its highest since mid-2015 at 95.74. That brought its gains in the past couple of months to around 14% and opened the door to bull targets at 97.28 and 100.00.

“Among the most liquid currencies, AUD/JPY is the world’s most volatile currency pair, but the volatility experienced recently is very unusual even by their standards,” said CBA strategist Joseph Capurso.

“We estimate there have been only a handful of four-week periods - less than 1% of trading days - that have been more volatile for AUD/JPY since 1980.” The yen has been under intense pressure as the Bank of Japan defies the global trend to policy tightening by pinning local bond yields near zero, while Australian yields surged.

The Australian yield premium over 10-year JGBs has widened by 90 basis points since early March to reach 287 basis points and levels last touched in 2017.

At the same time, the conflict in Ukraine has lifted prices for many commodities, boosting the terms of trade for resource-rich Australia while blowing out the cost of Japan’s imports.

Data out on Wednesday showed Japan’s trade deficit in March was four times larger than forecast at 412 billion yen, while its deficit with Australia had ballooned by 145% from a year earlier.

The diverging fortunes showed in the latest economic growth forecasts for 2022 from the IMF, which cut Japan to 2.5% from 3.4% but lifted Australia to 4.2% from 4.1%.

The kiwi also has a massive interest rate advantage, as its 10-year bond yields have climbed to be 327 basis points above JGBs, the largest gap since early 2017.

The New Zealand cash rate is already up at 1.5% and another aggressive half-point hike could come in May should inflation figures on Thursday prove as shocking as some expect.

Median forecasts see consumer price inflation accelerating to an annual rate of 7.1%, the fastest since 1990 and up from 1.5% in the first quarter of last year.