AUD/JPY edges higher to 100.75-80 area, upside potential seems limited

AUD/JPY trades with a mild positive bias on Friday, albeit it lacks follow-through buying.
A positive risk tone undermines the safe-haven JPY and benefits the risk-sensitive Aussie.
China’s economic woes and BoJ rate hike bets should keep a lid on any meaningful upside.

The AUD/JPY pair attracts some buyers during the Asian session on Friday and looks to build on the previous day's goodish rebound from the 99.20 area, or its lowest level since April 22. Spot prices currently trade around the 100.75 area, up just over 0.10% for the day, and for now, seem to have snapped a five-day losing streak, though any meaningful appreciating move still seems elusive.

The better-than-expected US macro data released on Thursday pointed to a still resilient economy and infused some stability in the financial markets. This is evident from a generally positive tone around the equity markets, which undermines demand for the traditional safe-haven Japanese Yen (JPY) and benefits the perceived riskier Australian Dollar (AUD). That said, hawkish Bank of Japan (BoJ) expectations hold back traders from placing aggressive bearish bets around the JPY and act as a headwind for the AUD/JPY pair.

Investors now seem convinced that the Japanese central bank could hike interest rates again at its upcoming policy meeting next week. The bets were reaffirmed by data indicating that core inflation in Tokyo – Japan's national capital – continued its upward trend for the third consecutive month in July following a fall to the 1.6% YoY rate in April. In fact, government data showed this Friday that Tokyo Core CPI, which excludes volatile fresh food prices, edged up to 2.2% YoY during the reported month from 2.1% previous.

This, to a larger extent, overshadows the fact that the headline Tokyo CPI ticked lower down to the 2.2% YoY rate from 2.3% and the core-core CPI (excluding food and energy) fell from 1.8% to the 1.5% YoY rate in July. Meanwhile, persistent worries about a slowdown in China – the world's second-largest economy – might continue to undermine the China-proxy Aussie. This, in turn, further warrants some caution before confirming that the AUD/JPY cross has formed a near-term bottom and positioning for any meaningful appreciation.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.

Is the Bank of Japan’s ultra-loose policy likely to change soon?

A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.

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