Australian Dollar steadies vs Japanese Yen as CPI cools, BoJ hawks

AUD/JPY experiences volatility amid cooling Australian inflation.
Australia's annual CPI rose 4.0% while monthly prices fell 0.7%, both slowing much faster than markets expected.
JPY defense prompts government intervention and rate hike momentum, highlighting building pressures for a tighter monetary policy.

Akhtar Faruqui FXStreet

AUD/JPY remains steady after six days of losses, trading around 0.6920 during the Asian hours on Wednesday. The currency cross moves little as the Australian Dollar (AUD) experiences minor volatility following the release of Australia’s Consumer Price Index (CPI) data.

Australian inflation slowed more than anticipated in May, offering some relief to policymakers. According to the Australian Bureau of Statistics, the annual Consumer Price Index (CPI) rose by 4.0% year-over-year, down from 4.2% in the previous month and lower than the 4.4% market consensus. On a monthly basis, consumer prices actually fell by 0.7%, a sharp reversal from the prior month's 0.4% increase and a softer reading than the forecasted 0.3% decline. Meanwhile, the Reserve Bank of Australia’s (RBA) preferred core inflation metric, the Trimmed Mean CPI, ticked up 0.4% for the month and rose 3.6% on an annual basis.

Over in Japan, momentum is building for tighter monetary policy just as government officials step up warnings to protect a weakening Japanese Yen (JPY). Japan’s Chief Cabinet Secretary Minoru Kihara stated that authorities will take appropriate action against excessive foreign exchange volatility if necessary. This stance was underscored by a high-level call between Japanese Finance Minister Satsuki Katayama and US Treasury Secretary Scott Bessent, keeping the market on high alert for official Yen-buying operations.

The Bank of Japan’s (BoJ) Summary of Opinions from its June meeting showed that a majority of board members supported raising the policy interest rate, noting that inflation risks are broadening and the underlying CPI is sustainably approaching its 2% target.

As a result of these conflicting forces, the upside for the AUD/JPY cross remains firmly capped. The combination of cooling Australian inflation, which dampens the need for higher RBA rate hikes, and heightened fears of direct currency intervention by Japanese authorities has prompted traders to handle the currency cross with extreme caution.

Economic Indicator

Consumer Price Index (YoY)

The Consumer Price Index (CPI), released by the Australian Bureau of Statistics on a monthly basis, measures the changes in the price of a comprehensive basket of goods and services acquired by household consumers. The indicator is the primary measure of headline inflation after a new methodology was applied to transition from quarterly to monthly readings, applying to data from April 2024 onwards. The YoY reading compares prices in the reference month to the same month a year earlier. A high reading is seen as bullish for the Australian Dollar (AUD), while a low reading is seen as bearish.

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