The AUD/JPY cross is experiencing a positive trend for the third consecutive day, reaching a fresh weekly high around the 96.85 region during the Asian session on Thursday. This upward momentum, however, must be approached with caution as spot prices remain within a well-established trading range. Traders should exercise prudence before committing to an extension of the recent recovery from the mid-95.00s, or the monthly low reached last week.
The Australian Dollar (AUD) continues to be supported by the Reserve Bank of Australia’s (RBA) hawkish outlook issued earlier this week. The RBA warned that they could not rule out a further increase in rates due to persistently high inflation. This assessment provides a solid foundation for AUD/JPY gains, bolstered further by China’s efforts to stabilize its beleaguered stock market. These measures offer additional support to the Australian Dollar, which is often used as a proxy for the Chinese economy.
In contrast to the positive factors mentioned above, recent data from the National Bureau of Statistics revealed disappointing inflation figures in China. China’s Consumer Price Index (CPI) reported a monthly increase of only 0.3% in January and a yearly decrease of 0.8%. Both figures fell short of expectations, which predicted a 0.4% rise and a 0.5% fall, respectively. The Producer Price Index (PPI), while slightly better than anticipated, still exhibited a year-on-year decline of 2.5% in January. These numbers contribute to concerns of deflationary pressures.
Despite these underwhelming figures, the overall risk-on sentiment in the market has dampened the demand for safe-haven currencies like the Japanese Yen (JPY). This decline in JPY value is further triggered by less hawkish comments from the Bank of Japan (BoJ) Deputy Governor Uchida Shinichi. During a meeting with local leaders in Nara, Uchida expressed the BoJ’s desire to maintain a stable and accommodative monetary environment due to the high level of uncertainty in the economic outlook. However, Uchida also foresees Japan’s economic recovery continuing and expects the positive wage-inflation cycle to strengthen. He echoes the BoJ’s belief that the probability of achieving the inflation target sustainably is gradually increasing.
Investors are becoming increasingly convinced that wage growth in Japan this year will outpace that of 2023, potentially setting the stage for the BoJ to exit its longstanding ultra-loose monetary policy. This expectation should limit any substantial depreciation in the JPY and cap gains for the AUD/JPY cross.
Nevertheless, considering the overall fundamental backdrop, bullish traders have the upper hand. The combination of the RBA’s hawkish outlook, China’s efforts to stabilize the market, and the prevalent risk-on sentiment supports the potential for further intraday appreciation in the AUD/JPY spot prices.
It is crucial for traders to monitor market conditions closely and exercise caution when entering positions. While the current trend is favorable, it is always wise to consider multiple factors and use technical analysis to identify potential entry and exit points. With the RBA’s warning of potential rate increases and China’s impact on the AUD, the AUD/JPY cross presents opportunities for traders seeking to capitalize on positive momentum.
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