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Aussie Looks Set to Test 100 Yen on Hawkish RBA, China Recovery

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(Bloomberg) -- Australia’s dollar has every chance of strengthening to 100 yen this year given the tailwinds supplied by a hawkish central bank and an economic recovery in China.

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The Aussie-yen pair is also likely to extend its recent gains due to the uber-dovish Bank of Japan, which has made the yen the worst-performing Group-of-10 currency this year.

The Aussie has already appreciated more than 14% versus its Japanese peer since the start of January, and reached a seven-year high of 96.882 last week. The last time it traded above the 100 level was in December 2014.

The Aussie jumped more than 1% against the yen on June 7 alone, when the Reserve Bank of Australia hiked its benchmark rate by a larger-than-forecast 50 basis points to counter inflationary pressures. Still, after breaking above resistance at its April 20 high, the Aussie then gave up some of its gains as the extra yield on the nation’s longer-maturity bonds over US Treasuries shrank.

“The bear flattening in Australia’s yield curve post the RBA front-loading its rate hikes along with fragile investor sentiment will restrain Aussie-yen upside for now, but China’s recovery along with further RBA rate hikes will see AUD/JPY move towards 100 by the end of 2022,” said David Forrester, a senior foreign-exchange strategist at Credit Agricole CIB in Hong Kong.

Australian employment data due Thursday may well prove the catalyst for another move higher in the Aussie. The jobless rate is forecast to have dropped to 3.8% in May from 3.9% the previous month, while hiring is expected to have stepped up to 25,000 from 4,000, according to Bloomberg surveys.

Dovish Kuroda

While the RBA has grown increasingly hawkish, the Bank of Japan hasn’t budged from its accommodative stance.

The BOJ is widely tipped to leave policy unchanged once again at a meeting Friday after Governor Haruhiko Kuroda said last week monetary tightening isn’t a suitable measure yet given the economy is still in the middle of a recovery.

“The combination of a bigger-than-expected hike by the RBA and in contrast BOJ’s entrenched stance of no change in policy and yield-curve control, implies that momentum remains on the upside” for the Aussie-yen, said Mitul Kotecha, chief emerging markets Asia and Europe strategist at TD Securities in Singapore.

The option market is also indicating risks are biased toward further gains in the currency pair. The premium to hedge near-term AUD/JPY downside compared with its upside dropped to 1.34% last Friday, from above 3% late last month.

Here are the key Asian economic data due this week:

  • Monday, June 13: India CPI

  • Tuesday, June 14: Australia business confidence

  • Wednesday, June 15: Australia consumer confidence; New Zealand current-account balance; China industrial production, retail sales, fixed assets ex-rural; Japan core machine orders

  • Thursday, June 16: Australia employment change; New Zealand GDP; Taiwan central bank rate decision; Japan trade balance

  • Friday, June 17: Bank of Japan rate decision; New Zealand manufacturing PMI; Singapore non-oil domestic exports; Malaysia trade balance

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