Westpac: AUD/JPY - Still Supported By Global Risk Mood

Westpac have noted that "the Japanese yen continues to show limited sensitivity to risk appetite, though admittedly it hasn't been tested often in recent weeks. But price action so far in 2020 suggests reduced downside risk on AUD/JPY on any return to turbulence in coming weeks and months. In terms of containing Covid-19, both Australia and Japan are dealing with renewed outbreaks but our baseline economic forecasts assume Asia's recovery is intact and that Australia's economy will rebound faster than Japan's. AUD's yield pickup over JPY is extremely low by historical standards but with the RBA showing no sign of changing its yield curve control policy and repeatedly brushing off the idea of a negative cash rate, there should be little danger for AUD/JPY from yield spreads near term. Meanwhile the BoJ has ramped up its balance sheet expansion since March. So the relative QE trend looks to be supportive of AUD/JPY, if partly in perception. We expect Australia's trade position to remain strong, with the iron ore price softening only to $110/t by year end and import demand sluggish, helping offset the damage to Australian exports from the ongoing travel restrictions. Our baseline forecasts are Y77 in Sep and Y79 by Dec."