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Short Aussie, Long Yen Is the Hot New FX Bet for Trade War

Ruth Carson
Short Aussie, Long Yen Is the Hot New FX Bet for Trade War

(Bloomberg) -- Short Australia’s risk-sensitive currency against the haven yen. That is emerging as one popular currency trade as investors look to profit from the U.S.-China trade war.

With the conflict escalating, Citigroup Inc. predicts the Aussie-yen will slip to about 72.75 in a few weeks, which marks a drop of more than 4% from a level of 76.07 in Asia Wednesday. Jeffrey Halley, a 30-year currency trading veteran and market analyst at Oanda Asia Pacific Pte, reckons the pair could fall below 70 in the next two months.

“Aussie-yen is the best bellwether for risk-off,” said Sean Callow, senior currency strategist at Westpac Banking Corp. “I don’t see a quick resolution to the U.S.-China trade war before the Group-of-20” meeting next month, he said.

With U.S. President Donald Trump bringing the trade spat back to the fore by threatening to impose tariffs on almost all Chinese imports, investors are looking to benefit not just from potential downside in the Aussie, but also from gains in the yen, which is proving to be the most sought-after haven currency.

One-month risk reversals, a measure of market positioning, signal options traders are most bullish on the yen among the Group-of-10 currencies, while being the least confident about the Aussie. Further, implied volatility is indicating potential for wild swings in the Aussie-yen cross over the next three months.

“There’s going to be the most value in being short Aussie because it’s such a proxy for China, and the yen is still loved as a haven,” said Oanda’s Halley.

Yuan Link

The Aussie is closely tied to the yuan as China is Australia’s largest trade partner, buying up commodities including iron ore. It’s a proxy for investors wary of trading the yuan given capital control measures. The Aussie-yen’s correlation with how the offshore yuan trades has been rising recently and climbed to 0.60 last week -- the highest since October -- according to data compiled by Bloomberg. That’s stronger than the relationship the Chinese currency has with Aussie-greenback.

The Aussie capped a fifth straight weekly loss against the yen on Friday and touched 75.331, its lowest since early January, when it hit a decade low amid the flash crash. Investors resumed selling Australia’s currency against the yen in Asia trading Wednesday in response to news that the U.S. is considering cutting off the flow of American technology to more Chinese companies.

“I see Aussie-yen potentially testing 72.75 in the next two weeks,” said Shyam Devani, senior technical strategist at Citi in Singapore.

Trade issues aside, the Aussie has also been under pressure from a faltering local economy and rising bets for an interest-rate cut by the Reserve Bank of Australia. Governor Philip Lowe said Tuesday he’ll consider easing at next month’s meeting to spur faster hiring.

“The weaker growth outlook and market pricing around RBA rate cuts should mean a depreciation in the Aussie dollar relative to the yen over the course of the year,” said Kerry Craig, global market strategist at JPMorgan Asset Management in Melbourne.

Yen Haven

The yen meanwhile has gained against all other G-10 currencies over the past month -- with an advance of 1.3% against the U.S. dollar, 2.2% versus the euro and 4.7% against the Aussie -- and strategists at some of the world’s biggest banks are predicting more gains.

Bank of America Corp. sees the yen strengthening against the euro as trade tensions linger, while Citigroup prefers shorting the greenback in favor of the yen.

Still, not everyone is as bearish on the Aussie’s prospects. Some analysts say the planned meeting between Trump and Chinese President Xi Jinping at the G-20 summit may prove to be a potential catalyst for the two sides to work toward a resolution on trade.

“As long as the U.S. trade talks with China, Japan and Europe are continuing and no further physical actions are taken, it’s hard to see markets turning extremely risk-off,” said Ko Haruki, head of the financial solutions group at CIBC World Markets (Japan) in Tokyo. “The Aussie in itself may not fall so sharply, limiting the downside in the Aussie-yen pair.”

(Adds selling of Aussie-yen with reports of new U.S. curbs on China in eighth paragraph.)

--With assistance from Michael G. Wilson, Masaki Kondo and Chikako Mogi.

To contact the reporter on this story: Ruth Carson in Singapore at rliew6@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani, Brett Miller

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