AUD/JPY slumps to fresh two-month low despite RBA’s 50 bps rate hike

AUD/JPY stands on a slippery ground as it refreshes the two-month low near 91.35 after the Reserve Bank of Australia’s (RBA) Interest Rate Decision. That said, the cross-currency pair’s latest weakness could be linked to the indecision over the RBA’s next move, as well as the risk-off mood.

RBA matches market’s forecast of announcing a 50 basis points (bps) of rate hike, the fourth in 2022, while inflating the benchmark rate to 1.85%. It’s worth noting, however, that the indecision over the next move of the Aussie central bank, amid recession fears and as the rate approaches the policymakers’ “neutral rate of 2.5%”, appear to challenge AUD/JPY bulls of late. The same could be linked to the RBA Statement that says that the central bank is not on pre-set path in normalising rates.

Also contributing to the AUD/JPY pair’s weakness could be the sour sentiment, mainly due to headlines concerning China. US House Secretary Nancy Pelosi’s visit to Taiwan and the likely hardships for Chinese chipmakers due to the American consideration of limiting shipments of American chipmaking equipment appear main challenges to the market sentiment. On the same line could be the news from a Chinese media report suggesting the dragon nation’s readiness for a military drill in Bohai, South China Sea.

Additionally, Bloomberg’s piece signaling no hard boundaries for Beijing’s Gross Domestic Product (GDP) also appears to weigh on the market’s risk appetite. The news quotes people familiar with the matter as said, “China's top leaders told government officials last week that this year's economic growth target of "around 5.5%" should serve as guidance rather than a hard target that must be hit.”

On a different page, chatters surrounding a jump in the Japanese wages and challenges for the Bank of Japan's (BOJ) easy money policies, mainly due to the broad inflation fears, also appeared to have drowned the USD/JPY prices. Recently, Japanese media Nikkei said that the average minimum wage in Japan is set to rise by a record 3.3% in the current fiscal year, which ends in March 2023. “A Japanese panel is seeking to raise the average minimum wage by 31 yen,” the news also mentioned.

Amid these plays, the US 10-year bond coupon declines 6.9 basis points (bps) to 2.54% at the latest. Further, Wall Street closed with mild losses while the S&P 500 Futures extend the previous day’s pullback from a two-month high.

Looking forward, AUD/JPY is considered the market’s risk-barometer pair and it will perform its role during the rest of the day, amid a lack of major data/events from either Australia or Japan. As a result, the qualitative factors that affect the sentiment, including headlines from China and relating to economic slowdown, will be important to watch for clear directions.

However, major attention will be given to Friday’s RBA Rate Statement as traders remain unconvinced of the Aussie central bank’s latest moves.

Technical analysis

In addition to the clear downside break of the 100-DMA and an upward sloping trend line from early January, around 92.65, the bearish MACD signals and the downbeat RSI (14) also keep AUD/JPY sellers hopeful.