Asia FX Shift: Joint Intervention Sparks Rotation Away from Aussie Dollar

The Australian dollar (AUD/USD) has long been used as a proxy for emerging Asia. However, recent events may be changing this dynamic. The yen's divergence from other Asian currencies against the US dollar is no longer evident after a joint US-Japan intervention.

This development raises questions about whether the region's currencies are poised to outperform. The capital redeployment thesis suggests that some of the capital that had been using the Australian dollar as a liquid proxy may begin rotating back into emerging Asia FX markets.

The Australian dollar is closely tied to the region due to its commodity superpower status and liquidity. However, if investors believe the relative outlook for emerging Asia FX is improving, they may shift their focus towards regional currencies. This could lead to the Australian dollar underperforming against regional currencies as capital redeployments occur.

The key catalyst for this potential shift in Asia FX will be the US labour market data, which includes job openings, ADP private sector employment, ISM non-manufacturing PMI, and weekly jobless claims. A moderation in US economic exceptionalism could provide the optimal backdrop for a sustained rally in Asia FX.