AUD/JPY - Yield differential contracts, risk reversals at 5-1/2 month low

The sideways action around 88.00 handle suggests indecision in the AUD/JPY market, although the bond yield differential and risk reversals indicate increased odds of a downside move ahead of the Japanese elections.

Aussie-Japan 10-yr yield spread narrows

• The spread or the difference between the Aussie and Japan 10-year government bond yield currently stands at one-month low of 267 basis points.
• The chart above shows the spread has breached the rising trend line support, thus it could narrow further in favor of the Japanese Yen.

Risk reversals at 5-1/2 month low

• The one-week 25-delta risk reversals hit 5-1/2 month low of -2.70. The negative print shows the cheap out of the money are being favored as a hedge against Japan election surprise (a strong performance by Kibō no Tō).