By Joanne Masters

The tendency in popular press is to focus on the Aussie dollar against the US dollar. Certainly, there’s been plenty to write about as the US dollar has strengthened in recent weeks, taking the Aussie dollar from a comfortable 0.92-0.94 to settle somewhere around 0.87.

However, there is another interesting story and that is the Australian dollar against the Japanese Yen. While the Aussie dollar is under pressures against the greenback, fairly steady against the euro, NZ dollar and pound, it has soared against the yen in the past month, hitting seven years high this week. And, let’s not forget, that Japan remains an important trading partner (particularly for commodities) with annual trade over $70 billion a year.

 carrytrade

Source: Yahoo

Given the Aussie’s steady performance on most cross rates, this is mostly a Yen story. It’s no surprise that the Yen is under pressure. September quarter GDP earlier this week highlighted just how weak the Japanese economy is, with growth down an annualized 1.6% in Q3, following a 7.3% fall the previous quarter. 

At the same time, inflation slowed to 1%, the lowest in nearly a year (well below the central bank’s target of 2%) and job creation weakened for the first time in over three years.

Meanwhile, the Bank of Japan continues its battle to boost inflation expectations and support economic recovery. Last Friday, the BOJ surprised financial markets by expanding its already aggressive campaign of yearly asset purchases.

The dire state of the economy has seen PM Abe delay the second scheduled increase in consumption taxes and announce he will dissolve parliament this week and hold a snap election next month.

By contrast, RBA Governor Stevens addressed CEDA this week. To offset the weakening mining sector, the RBA sees stronger non-mining activity, improving productivity, rising household wealth and strong housing activity.

While Stevens gave a clear indication that interest rates rises are not on the immediate horizon, it is important to remember that Australia still sports one of the highest cash rates amongst advanced economies. And that is not going to be threatened any time soon.

While the Fed is widely expected to commence a tightening cycle in mid 2015, US rates have a long way to catch up. Same for the UK. Meanwhile, Japan and Europe are both desperately trying to jumpstart their economies. This leaves the Aussie dollar and NZ dollar as coupon stand-outs in a world still awash with liquidity. Carry, anyone?