Australia and Japan are two island nations that have been battered by the equities rout in China. Japan has its own set of challenges which it is trying to address under the economic stimulus program known as Abenomics, while Australia battles declining commodity prices as a result of structural weakness in China, declining global demand, a strong US dollar and persistent weakness in the region. Of course, one could take an optimistic approach to the economic fortunes of these two island countries – but that would not paint an accurate picture of the short-term reality. The AUD/JPY pair has turned in a mixed performance over the past 1 year, but it is clear that the Japanese yen has strengthened substantially against the Australian dollar.

A year ago, ¥102.2240 was required to purchase AUD $1; today that figure has dropped to ¥86 .37837 for AUD $1. That represents a 15.5% appreciation of the Japanese yen in 1 year. Granted, the AUD rallied from a low of ¥82.99738 on 29 September to a high of ¥88.42302 on 12 October. Traders who have taken a bullish approach to the AUD have been well rewarded over the past 2 weeks, but the Aussie dollar has retreated over the past day or two.

Why is this?

Simply put, AUD traders are deeply concerned about the impact of China weakness on the Australian economy. Chinese trade data has all but put an end to 9 days of consecutive gains for the Australian dollar. On Tuesday, 13 October currency traders across Australia and beyond sold the Aussie en masse. The AUD depreciated by USD $0.01 to trade at USD $0.7251. Of all the major currencies on the market, the AUD was the best performer in October. It gained as much as 4 percentage points against the USD, but that rally has all but ended.

In fact, you would be well rewarded for short-selling the AUD as a put option. Weak Chinese import data continues to weigh heavily on the Aussie, since Australia is a major exporter to China. With lower production being demanded, Australian mining and energy companies are feeling the pinch. In fact so severe were the declines in Chinese imports that they dropped by as much as 17.7%. Exports from China were less dramatic, but they too slid by 1.1%.