AUD, JPY flows: AUD remains under pressure, JPY firm

A barren calendar on Tuesday makes it hard to see major moves in FX, but there is a mild risk negative tone, with equities generally lower led by China. This favours the safe havens, and the JPY is currently the favoured safe haven, with AUD/JPY continuing its decline overnight.

AUD/USD still looks as if it could rally back to test the recent highs if Chinese equities stabilise, with front end yield spreads against the USD close to the lows of recent years. But as long as regional sentiment remains weak, the AUD will tend to remain under pressure.

Against the JPY, all measures suggest AUD/JPY has overshot on the upside, with both yield spreads and risk premium measures pointing lower. There are likely to be significant carry positions in place which will be vulnerable as long as risk sentiment remains fragile.  Of course, much the same could be said about most JPY pairs, but regional positioning is often more concentrated in AUD/JPY. There looks to be scope to correct back to 100 or below in AUD/JPY as positions are unwound, but this may well be accompanied by general JPY gains as AUD/USD should find support near 0.66.