BofA sets AUD/JPY target at 100, cites Japan elections, RBA pause

BofA FX strategists recommend buying AUD/JPY at 92.80, targeting 100 with a stop loss at 89.50, citing undervalued Australian dollar and overvalued Japanese yen as rationale. The recommendation hinges on expectations of the Japanese Upper House elections and a potential pause in RBA rate hikes. A key risk to the trade is the pair's high correlation with the S&P 500, where a policy-driven sell-off in global stocks could negatively impact AUD/JPY.

Analysis

Bank of America (BofA) FX strategists have issued a tactical bullish recommendation to buy the AUD/JPY currency pair, referencing a spot level of 92.80, with an upside target of 100 and a stop loss set at 89.50. The firm's positive outlook is underpinned by the view that current valuations for the Australian dollar are unduly low, while those for the Japanese yen are perceived as excessively high, suggesting that prevailing market levels are 'stretched'. Anticipated catalysts for the pair's upward movement include the upcoming Upper House elections in Japan and an expected pause in interest rate hikes by the Reserve Bank of Australia (RBA) in July. Acknowledging potential headwinds, BofA identifies a significant risk stemming from the AUD/JPY's high correlation with the S&P 500; a policy-driven sell-off in global stock markets could negatively impact the currency pair. To manage this equity market sensitivity, the stop loss has been strategically positioned below the 90.00 threshold.

Key Decisions for Investors

• Investors could consider acting on BofA's AUD/JPY long recommendation, using the 92.80 entry, 100.00 target, and 89.50 stop-loss, especially if their own analysis aligns with the undervalued AUD and overvalued JPY thesis.
• It is crucial to monitor developments surrounding the Japanese Upper House elections and forward guidance from the Reserve Bank of Australia in July, as these events are cited as primary catalysts for the anticipated appreciation.
• Given the explicitly stated high correlation with the S&P 500, investors should actively manage risk associated with potential downturns in global equity markets, as this could directly undermine the recommended trade's performance.