AUD/JPY made a 7-year high in early June at 96.88 then pulled back to the just under 92.00 before settling back into a range. Broad Yen weakness has been seen across the board with USD/JPY hitting a 24-year peak recently.
The monetary policy of Japan’s Ministry of Finance (MoF), and by extension the Bank of Japan (BoJ), is going the opposite direction of other global central banks, with the exception of the People’s Bank of China. The BoJ recently committed to extending their yield curve control program (YCC) and are close to holding 50% of all Japanese government bonds (JGBs) on issue.
The RBA on other hand has recently committed to a more aggressive tightening path for monetary policy than previously anticipated by the market. It hiked by more than the consensus for the May and June meetings and there is little to say that this won’t happen again.
Second quarter Australian CPI will be released 27th July. It was first quarter CPI coming in at 5.1% year-on-year that prompted the RBA to lift rates. First quarter CPI was 2.1% quarter-on-quarter. The 2021 Q2 CPI was 0.8% and this will be dropping off the annual number this time around.
Observing the energy and agricultural markets over the second quarter, it is shaping up to be a print larger than 0.8%. The surge in futures prices of these commodities occurred at the end of March when Russia invaded Ukraine.
The flow through effect into the real economy was only felt after a month or so after those dramatic price rises. Certainly, anyone living in Australia would have been shocked in the supermarket and at the petrol bowser through the second quarter.
This is the period that the Australian Bureau of Statistics (ABS) will be measuring consumer price changes. The market may not be fully cognizant of the probability that the July CPI print could be much larger than the RBA would like.
RBA Governor Philip Lowe has made it clear that the bank is ready to act decisively if warranted. A jumbo hike in August, on top of the rises in May, June and July, should not be ruled out.
The Australian fundamental backdrop remains strong with low unemployment, solid growth, positive international trade and debt at relatively tame levels, publicly and privately. The market is not focused on that for now, monetary policy appears to be in the driver’s seat. The aggressive hawkish stance from the Federal Reserve has seen the US Dollar rally and AUD/USD has been pummeled in the melee.
AUD/JPY on the other hand, could have some favorable tailwinds about to pick up.
Buy near 93.25, stop loss at 91.25 and take profit at 96.45. Additionally, if Japan changes monetary policy or actively intervenes in the FX market, exit the trade. Developments in China should also be monitored for macro implications and could also trigger an exit from the trade.