The Australian Dollar is trading near 111.00 against the Japanese Yen, while the New Zealand Dollar is near 89.50, both slightly higher but still significantly below their August levels [1]. The Bank of Japan (BoJ) is expected to raise its policy rate to 1.25% on Friday, a move anticipated to disrupt the popular carry trade strategy of borrowing Yen at low rates to invest in higher-yielding currencies such as the Australian and New Zealand Dollars [1].
Currently, borrowing Yen at 1% and investing in Australian Dollars yields a 3.10% interest rate differential, while the New Zealand Dollar offers a 1.50% differential before accounting for hedging or spreads [1]. However, recent declines in AUD/JPY and NZD/JPY have wiped out years' worth of carry trade gains in just a few weeks. Specifically, NZD/JPY has fallen over six Yen from its August high near 95.00, and AUD/JPY has dropped five Yen from its August high near 115.00 [1].
CFTC data shows that large speculators shifted from a net short position of 92.2K Yen contracts to a net long of 10.8K in the week to September 8, marking the largest weekly swing since early August. This indicates that many traders exited their short Yen positions ahead of the anticipated BoJ rate hike [1]. However, not all market participants are reflected in these figures, as banks and leveraged funds do not report weekly, and ongoing selling pressure is still evident in the currency pairs [1].
Japanese institutions, such as life insurers and pension funds, may continue to repatriate funds as Japan's 10-year government bond yield reaches a three-decade high, further pressuring the AUD and NZD against the Yen [1]. Meanwhile, New Zealand's economy grew by 0.2% in the second quarter, slightly above the 0.1% forecast but well below the previous quarter's 0.9% growth. The Reserve Bank of New Zealand raised its rate to 2.75% on September 2 and may consider another hike this year, according to its own forecasts [1].
CONCLUSION
The Australian and New Zealand Dollars remain under pressure ahead of the Bank of Japan's expected rate hike, with recent sharp declines erasing years of carry trade gains. Market positioning has shifted in favor of the Yen, and Japanese institutional flows may continue to weigh on the AUD and NZD. Economic data from New Zealand and central bank actions suggest ongoing uncertainty for these currency pairs.