Japan’s central bank downwardly blindsided with a heavy-handed hawkish shock. Nonetheless, even after all of the above/under pinch, the Yen remains embattled. RBA risk sentiment favored the Australian Dollar (AUD). In a statement, BoJ Governor Kazuo Ueda emphasized the central bank’s readiness to “adjust the degree of monetary easing as needed” to achieve inflation targets. Of the major AUD cross-rates, the AUD/JPY currency pair is the biggest winner. It’s getting close to the key psychological level of 93.00 as the American trading day winds down.
Market analysts tell us that the Australian Dollar has appreciated by almost a percentage point against the Yen today. This increase is indicative of the wider trend of risk-on flows affecting currency valuations. This is further complicated by relaxing trade tensions which have lowered the attractiveness of the Yen as a safe-haven currency even more.
Bank of Japan’s Stance on Monetary Policy
Governor Ueda’s comments on monetary policy changes signals the increasing alarm over inflation, especially across core goods. He underscored that elevated food prices continue to be an upside risk to core inflation. We can read this to mean that the BoJ is more likely to act if it still misses its inflation targets.
It’s true that the BoJ has maintained its aggressive accommodative monetary policy longer than anyone. Nevertheless, Ueda’s remarks suggest that a turn in the direction of policy normalization could be on the way later this year. This proposed tweak would still allow for robust economic expansion without letting inflation go off in orbit.
Even with these reassurances from the BoJ, the Yen continues to battle the Aussie Dollar. The contrasting monetary policy outlooks of Japan and Australia have produced a fascinating situation. Investors have now developed a bias for the currencies that have the highest anticipated yields.
Australian Economic Indicators Impacting Currency Valuation
Favorable economic indicators further increase the strength of the Australian Dollar. A major influence on this is the quarterly Consumer Price Index (CPI) published by the Australian Bureau of Statistics (ABS). This pivotal piece of data, an invaluable determinant in the path of inflation, is of great importance to market perceptions and thus the valuation of the AUD.
As it stands, Australia’s CPI data won’t be released until Wednesday – about 25 days after the quarter ends. Furthermore, analysts predict that strong inflation figures will continue sending the Australian Dollar higher against its Japanese counterpart. Japan’s national CPI figures will be published on Thursday. Depending on what comes out, this announcement has the potential to tip market sentiment in favor of the Yen or against it.
Add to that increasing market anticipation for each of these significant upcoming releases, making trading currencies even more complicated. Investors are speculatively balancing possible economic changes in each country.
Market Sentiment and Risk Flows
When current market sentiment is overly one-sided in favor of riskier assets, e.g. This is evident from the AUD/JPY cross, which has made a three-day run higher. Increasingly positive global economic fundamentals combined with thawing trade relations have renewed investor appetites. In order to do that, many are now looking for a higher return in currencies such as the Australian Dollar.
The AUD/JPY trading pair exploded, climbing to almost 93.00. This whopping 56% move up signifies just how extreme today’s risk-on environment is right now. Traders are developing bullish sentiment ahead of a wider economic recovery in Australia. This decreasing pessimism is shown in the Australian Dollar’s further appreciation against the Yen, which showcases Japan’s deteriorating economic picture.