AUD/JPY retakes 99.00 mark and beyond, upside potential seems limited

AUD/JPY steadily moves back closer to a multi-week high touched on Wednesday.
The RBA’s hawkish stance and a positive risk tone continue to benefit the Aussie.
Bets for another BoJ rate hike in 2024 should limit the JPY losses and cap the cross.

The AUD/JPY cross attracts some dip-buying during the Asian session on Thursday and jumps back above the 99.00 mark in the last hour, though remains below over a three-week top touched the previous day.

The Australian Dollar (AUD) continues to draw support from a more hawkish stance adopted by the Reserve Bank of Australia (RBA). In fact, the Australian central bank reiterated on Tuesday that policy will need to be restrictive until confidence returns that inflation is moving sustainably towards the target range. Adding to this, RBA Governor Michele Bullock stated that the recent data has not significantly influenced the policy outlook.

Moreover, the latest consumer inflation figures released on Wednesday showed that the core CPI remains above the RBA's 2-3% target band and is not enough to justify rate cuts in the near term. Meanwhile, the RBA's semi-annual Financial Stability Review (FSR) revealed that the risk of widespread financial stress remains limited. Furthermore, a positive risk tone undermines the safe-haven Japanese Yen (JPY) and benefits the risk-sensitive Aussie.

That said, growing acceptance that the Bank of Japan (BoJ) will hike interest rates again by the end of this year should help limit deeper JPY losses and keep a lid on the AUD/JPY cross. The bets were reaffirmed by the BoJ meeting minutes released earlier today, which showed that board members shared a view over the need for vigilance to the risk of inflation overshoot and that it was appropriate to adjust the degree of monetary support moderately.

Even from a technical perspective, the formation of a 'Death Cross' on the daily chart – with the 50-day Simple Moving Average (SMA) crossing below the very important 200-day SMA – warrants some caution for bullish traders. Hence, any subsequent move up is more likely to confront stiff resistance and remain capped near the 100.00 psychological mark, or the 200-day SMA, which should now act as a key pivotal point for the AUD/JPY cross.

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. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.

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