- AUD/JPY oscillates in a narrow trading band for the third straight day on Tuesday.
- Traders opt to wait on the sidelines ahead of Australian CPI and BoJ on Wednesday.
- BoJ rate cut bets, a softer risk tone benefits the safe-haven JPY and caps the upside.
The AUD/JPY cross struggles to gain any meaningful traction during the Asian session on Tuesday and remains confined in a three-day-old range, well above a three-month low touched last week. Spot prices currently trade around the 100.85 region, nearly unchanged for the day as traders keenly await this week's important macro data and central bank event risks before placing fresh directional bets.
The quarterly Australian consumer inflation report is due for release on Wednesday, which might influence the Reserve Bank of Australia's (RBA) next policy move and drive the Australian Dollar (AUD). Apart from this, the official Chinese PMI prints will play a key role in providing some meaningful impetus to the China-proxy Aussie. The focus, however, remains glued to the crucial Bank of Japan (BoJ) policy decision, which should determine the near-term trajectory for the AUD/JPY cross.
In the meantime, expectations that the Japanese central bank could hike interest rates again on Wednesday might continue to act as a tailwind for the Japanese Yen (JPY). 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. Apart from this, a softer risk tone benefits the JPY's relative safe-haven status and caps the upside for the AUD/JPY cross amid China’s economic woes.
From a technical perspective, the recent range-bound price action might still be categorized as a bearish consolidation phase amid the overbought Relative Strength Index (RSI) on the daily chart. Moreover, the lack of any buying interest suggests that the path of least resistance for the AUD/JPY cross is to the downside. That said, it will still be prudent to wait for acceptance below the 200-day Simple Moving Average (SMA) before positioning for an extension of the recent downtrend.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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