AUD/JPY trades with modest gains above 98.00, remains confined in one-week-old range

AUD/JPY regains positive on Wednesday amid the emergence of some JPY selling.
The RBA’s hawkish stance and the BoJ rate-hike uncertainty remain supportive.
Geopolitical risks and a softer risk tone might keep a lid on any meaningful gains.

The AUD/JPY cross attracts some dip-buying during the Asian session on Wednesday and for now, seems to have stalled the previous day's rejection slide from the 99.00 mark, or a nearly three-week top. Spot prices, however, remain confined in a narrow band held over the past week or so and currently trade around the 98.20 area, up just over 0.20% for the day.

The Australian Dollar (AUD) continues to draw support from the Reserve Bank of Australia's (RBA) hawkish stance, showing readiness to hike interest rates in the face of more upside risks to inflation. This, along with increasing chatters regarding big economic stimulus measures from China's government, turns out to be another factor underpinning the China-proxy Aussie. Apart from this, the emergence of some selling around the Japanese Yen (JPY) assists the AUD/JPY cross to regain some positive traction.

Meanwhile, the political uncertainty led by Japanese Prime Minister Fumio Kishida's decision to step down could lead to a pause in the Bank of Japan's (BoJ) plan to raise interest rates steadily, which, in turn, is seen weighing on the JPY. Adding to this, government data released this Wednesday showed that Japan's trade deficit ballooned to ¥621.84 billion in July amid a smaller-than-expected, 10.3% increase in exports and a 16.6% jump in exports, pushed up by a weaker yen rather than a robust increase in volume.

Investors, however, seem convinced that an improving macroeconomic environment in Japan should encourage the BoJ to raise interest rates again later this year. This, along with persistent geopolitical risks and a slight deterioration in the global risk sentiment, should help limit any meaningful JPY downfall and keep a lid on the AUD/JPY cross. This makes it prudent to wait for a convincing breakout through the short-term range before positioning for an extension of the recovery from over a one-year low touched this August.

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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