Citibank Trade of the Week: Sell AUDJPY

Sell AUDJPY 86.91, target 84.25, stop loss 88.10

USDJPY has traded higher in the wake of the strong US employment report. Further USD appreciation may be in store as the market moves to price in steeper trajectory for Fed policy. However, JPY may not be the main beneficiary of this phenomenon for two reasons. First, re-pricing on the pace of Fed tightening could curtail risk appetite which may be JPY-positive. Second, the Japanese government will not proactively try to depreciate its currency in the current environment. Indeed, the bigger risk may be that authorities try to slow down a move towards further depreciation. 

·        US Treasury Secretary Lew recently confirmed that the TPP agreement was going to include a prohibition against FX manipulation by the affiliate nations. This means that USD appreciation and JPY depreciation is still a politically nervous issue. 

·        After the Oct 30 meeting, BoJ action early next year looks increasingly likely. However, a sharp rise in the currency beyond 125 would marginally detract from the argument for earlier action. 

·        The case for AUD depreciation on a broad USD up move looks far more straightforward. Although investors believe the RBA will be on hold for the time being, markets continue to discount eventual easing and this means that policy divergence between the two countries is widening. Coupled with the potential negative impact of a Fed driven contraction in risk appetite and ongoing drag from slower growth in China, this spells a lower AUD. Furthermore, authorities are likely to welcome AUD depreciation since it will help facilitate rebalancing in the economy away from the resources sector. 

·        This week sees the employment report in Australia. While response to the data is often erratic, jobs growth has been one of the few bright spots for the Australian economy. This means that the bigger shock would be with weakness and AUD vulnerability to such an outcome may be heightened given the less fav

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