AUD, JPY flows: AUD makes modest gains on RBA, JPY stays weak

The main news overnight is the RBA decision not to cut rates further at this stage. A 25bp cut had been 85% priced so the AUD rallied on the news, although perhaps somewhat less than might have been expected. AUD/USD is only up 20 pips from the pre-meeting level and still below its closing level in the US. The RBA is now priced to cut 25bps in August, with a probability of 88%, and there are 63bps of easing priced by year end rather than 75bps as priced before the decision. The generally firm USD tone has likely limited the positive AUD reaction, but we do see some scope for gains to extend, with yield spreads still suggesting some upside risks and local equity markets also looking supportive.   

The JPY has remained weak overnight, once again reaching new all time lows against the CHF and new 1 year lows against the EUR. This is now the seventh consecutive week of EUR/JPY and CHF/JPY gains, a run that is rare and hasn’t been seen since 2016. At these levels , it looks hard to justify, but may relate to the heavy long JPY positioning still evident in the CFTC data. There isn’t a lot on today’s calendar to suggest this will reverse today, but there is likely to be a sharp reversal at some point, most likely on a sharp equity market decline.