Sean Callow, analyst at Westpac, suggests that persistent optimism over a partial trade deal by both US and Chinese officials plus the breakthrough in Brexit negotiations have improved risk sentiment notably in recent weeks and has sparked a rally in risk barometer AUD/JPY to highs since late July.
Key Quotes
“The global risk mood (including a record high on the MSCI World Index) has reinforced the FOMC’s message of an indefinite pause on rate cuts. This will be welcomed by the RBA as it predicts Australia’s economy to accelerate from the slowest growth pace since 2009.”
“The risk rally and accompanying rise in US yields has made JPY the weakest G10 currency over the past month. This environment has provided some cover for the Bank of Japan’s cautious policy tweak end-Oct.”
“The question of course is how long this can last. While a limited US-China trade agreement seems likely, we still lean to the gloomy side of market expectations in terms of the scale of removal of tariffs.”
“We also see downside risks to Australia’s key commodity prices in coming weeks and see scope for greater RBA rate cut risk to be priced for Feb 2020, from today’s <50% chance. This should mean AUD/JPY has little further upside near term, with risks by Dec back to 73 or lower."
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