Australia, NZ dollars lose ‘carry’ appeal as Japanese yields rise

SYDNEY: The Australian and New Zealand dollars were trying to find their footing on Wednesday after suffering staggering losses against the yen as rising Japanese yields threatened to kill flows into usually crowded carry trades.

The Bank of Japan’s shock move on Tuesday to effectively allow Japanese bond yields to rise was a body blow to investors that typically borrow yen at uber-low rates to buy higher yielding currencies.

The Aussie and kiwi are among the most liquid of these carry trades and took the biggest hit when the BOJ badly wrong-footed a very thin market in the week before Christmas.

The Aussie was last at 88.02 yen having fallen five whole yen at one stage on Tuesday to hit a nine-month trough at 86.99 yen.

Its 4.1% loss for the session was the biggest since mid-2016 and shattered major chart support at 90.79.

The kiwi also shed 4% overnight to trade at 83.67 yen, in the process breaching its 200-day moving average at 84.74.

“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 is also seen as signifying a formal end to Japan’s tolerance/desirability of yen weakness.”

Japanese investors have the largest hoard of foreign assets in the world and higher yields at home could make it more attractive for them to bring some funds back.

That risk was enough to see Australian 10-year yields surge 20 basis points to 3.72%, thus maintaining the spread over Japanese debt at 330 basis points.

Australia, NZ dollars skid as yen surges on BOJ policy shift

The rush out of short yen positions also saw the Aussie lose ground more broadly, including hitting a 10-month low on the euro.

It fared somewhat better on the US dollar to steady at $0.6688, after touching a one-month trough of $0.6629 overnight.

That still leaves it far short of the 200-day moving average at $0.6888 and in danger of testing major chart support around $0.6585.

The kiwi was left at $0.6336, having made a three-week low of $0.6301 overnight.

That was well away from its recent high of $0.6513 and closer to its 200-day moving average at $0.6260.

Local data underlined the impact rising interest rates were having in New Zealand, with the ANZ-Roy Morgan consumer sentiment index sliding to the lowest since the survey began in 2004.