AUD/JPY has been in a pronounced downtrend since late 2014. The move down was initially an AUD-specific affair as AUD/USD fell sharply from above 0.95, but thus far in 2016, it has been all on the dramatic unwind of a good portion of USD/JPY’s 2012-2015 appreciation (from above ¥120 to around ¥100). A combination of lower US Treasury yields as Fed tightening expectations keep getting pushed back, and significant underperformance by Japanese stocks market (led by financials) after the BoJ took interest rates negative in January, largely account for the Yen’s stronger showing.

Near term (rest of the year) we expect that the Japanese authorities’ will show determination to prevent a sustained breach of ¥100, with risks that below ¥97-98 the currency could retrace all the way to the pre ‘Abenomics’ levels near ¥80.

A sustained move in USD/JPY back above ¥100 will nevertheless require some combination of higher US yields and stronger local stock market. If this fails to transpire, our forecast for AUD/JPY back up to near ¥80 by year end will be hard to achieve.

Further out, AUD/JPY is seen falling next year as the AUD weakens but not the JPY in general. The Yen is now ‘cheap’ on longer term valuation metrics. As such, strength should kick in in 2018 and beyond to further pressure AUD/JPY.

Copyright © 2016 NAB, eFXnews™Original Article