AUD/JPY dipped sub 94.00 earlier before support emerge. The pair was last just under 94.10. The pair is around 2% off recent highs but still well above early July lows sub 91.50. At face value, AUD/JPY still looks too high relative to the evolution of global commodity and equity prices.

• However, as the table below shows, the recent correlations between AUD/JPY and these macro drivers hasn't been that high. Note these correlations are level based and are calculated for 1,3 and 6 month tenors.
• We have seen some pick up in correlation with global equities over the past month, but the more consistent correlation is with the 2yr AU-JP yield differential. i.e. carry trade related trends have been a more important driver of this cross.
• Even this most recent dip in AUD/JPY has been strongly correlated with relative yield momentum.
• During historical recession episodes AUD/JPY's correlation with global equities and commodities is typically much higher. We were well above 90% during the height of the covid pandemic and very high as well in 2008.
• There are of course differences in the current environment, with Australia's terms of trade outperformance relative to Japan, which is clearly aiding higher AUD/JPY levels.
• Still, in the current environment, if recession fears intensify, we would expect AUD/JPY correlations to rise with the likes of equities and commodity prices.

Table 1: AUD/JPY Correlations