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AUD/JPY weakens to near 96.50 on softer Australian CPI inflation data

  • AUD/JPY softens to around 96.50 in Wednesday’s Asian session.
  • Australia’s CPI inflation eases to 0.7% QoQ in Q2, softer than expected. 
  • Political risks in Japan could weigh on the Japanese Yen and help limit the losses for the cross. 

The AUD/JPY cross edges lower to near 96.50 during the Asian trading hours on Wednesday. The Australian Dollar (AUD) weakens against the Japanese Yen (JPY) after the softer-than-expected Australian inflation data. Traders will take more cues from the Australian June Retail Sales report, which is due later on Thursday.

Data released from the Australian Bureau of Statistics (ABS) on Wednesday revealed that the country’s Consumer Price Index (CPI) increased 0.7% QoQ in the second quarter (Q2), compared to a rise of 0.9% in Q1. This figure came in below the market consensus of 0.8% in the reported period.

Meanwhile, Australia’s CPI inflation eased to 2.1% YoY in Q2 from 2.4% in Q1 and was softer than the expectation of 2.2%. The monthly Consumer Price Index rose by 1.9% YoY in June versus 2.1% prior. The Aussie attracts some sellers in an immediate reaction to the softer inflation data. 

The Japanese Yen remains weak as political risks mount. The ruling Liberal Democratic Party’s defeat in the July 20 elections creates a headwind for the JPY and might cap the downside for the cross. Analysts believe that Japanese Prime Minister Shigeru Ishiba may resort to populist spending to shore up support for his weakened coalition. 

“While the election has passed, there are still some political risks with the potential for PM Ishiba to step down and for an LDP leadership election in September,” said Derek Halpenny, MUFG Bank’s head of global markets research. 

The first waves from the tsunami have hit the coastline of Hokkaido in northern Japan. Broadcaster NHK stated that the waves measured around 30 cm. Officials in multiple countries, including Russia and the US Pacific coasts, have issued warnings that subsequent waves could be much higher. Traders will keep an eye on the further developments surrounding the Japan tsunami warning.

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

Author

Lallalit Srijandorn

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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