Aussie Risks Losing Ground Versus Yen as Trade, Japan Risks Loom

The Australian dollar may struggle to hold gains against the yen in the near term as the resurgence in US-China trade tensions and political uncertainty in Japan weigh on the currency pair.

It tumbled 2.5% on Friday to below the psychological 100 level, days after touching its highest in nearly a year. The move followed the collapse of Japan’s ruling coalition and after President Donald Trump threatened tariffs of 100% on China.

Although the currency pair recovered on Monday after the US administration toned down its rhetoric, some analysts are skeptical it will meaningfully rise above 100. Further weighing on the pair is uncertainty over pro-stimulus leader Sanae Takaichi becoming Japan’s next leader as it allows for the possibility of faster Bank of Japan rate hikes and a stronger yen.

“At this stage we aren’t rushing to forecast 100+ AUD/JPY levels on a sustained basis” said Ray Attrill , head of FX strategy at National Australia Bank Ltd. With Takaichi’s ability to form a government in question, “there are doubts as to whether political opposition to further BOJ policy tightening will necessarily prevail beyond the short term,” he said.

That caution reflects the Aussie-yen’s role as a closely watched barometer of market sentiment as Australia’s dollar is heavily influenced by the economy of China, its main trading partner. The yen is largely seen as a haven asset, even though this status is being due to wild currency swings spurred by the .

Jane Foley , head of FX strategy at Rabobank, said that a BOJ rate hike on Oct. 30 cannot be ruled out even if Takaichi becomes prime minister.

“It is not hard to put together an economic argument in favor of a BOJ rate hike at the end of this month,” she said. “If Takaichi signals she will not be leaning on the BOJ, the yen could snap back. This risk could limit further upside in AUD/JPY near-term.”

While much of the risk is centered on the yen, the Australian dollar faces its own domestic test this week as the nation reports employment data on Thursday. A higher-than-expected unemployment rate should increase dovish wagers on the nation’s Reserve Bank, after Governor Michele Bullock’s on the economy on Friday.

Beyond the fundamental data, crowded investor positioning is also flashing a warning sign.

“Our data of real money positioning on the Australian dollar is pretty much at its five-year high in terms of being overweight,” said Bart Wakabayashi , Tokyo branch manager at State Street Bank & Trust.

“The flows of Aussie-yen are starting to slow down in terms of buying,” he said. “The pair is a prime candidate for unwinding given its overweight positioning.”