AUD/JPY sticks to gains near 107.00 on strong Aussie CPI prints; lacks follow-through

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The AUD/JPY cross builds on the overnight bounce from the vicinity of the 106.00 mark, or a nearly one-week low, and attracts buyers for the second day on Wednesday.

AUD/JPY gains positive traction for the second straight day amid a combination of supporting factors.
Stronger-than-expected Australian inflation data reaffirms RBA rate hike bets and underpins the AUD.
Fiscal concerns, political uncertainty, and a positive risk tone weigh on JPY, further supporting the cross.

The AUD/JPY cross builds on the overnight bounce from the vicinity of the 106.00 mark, or a nearly one-week low, and attracts buyers for the second day on Wednesday. Spot prices stick to modest intraday gains around the 107.00 round figure following the release of the latest consumer inflation figures from Australia, though the uptick lacks bullish conviction.

Data published by the Australian Bureau of Statistics (ABS) showed that the headline Consumer Price Index (CPI) rose 3.8% YoY in December from 3.4% prior, while the annual Trimmed Mean CPI for December climbed 3.3% vs. 3.2% in November. Adding to this, the quarterly CPI prints came in above expectations, reaffirming bets for an interest rate hike by the Reserve Bank of Australia (RBA) in February and boosting the Aussie.

The Japanese Yen (JPY), on the other hand, is pressured by concerns about Japan's fiscal health on the back of Prime Minister Sanae Takaichi's aggressive spending and tax cut plans. Moreover, domestic political uncertainty ahead of a snap election on February 8 and the prevailing bullish sentiment further undermine the safe-haven JPY, which fails to gain any respite from the Bank of Japan's (BoJ) hawkish outlook.

In fact, the BoJ’s December meeting minutes showed that policymakers are becoming more confident that Japan is sustaining a moderate wage–price cycle, and using that assessment to justify another step toward less accommodative policy. This, along with speculations that Japanese authorities would step in to stem further weakness in the domestic currency, could limit JPY losses and keep a lid on the AUD/JPY cross.

(This story was corrected on January 28 at 07:40 GMT to say that Australia’s CPI inflation rose to 3.8% YoY in December, not 3.6%.)

Economic Indicator

Quarterly RBA Trimmed Mean CPI (YoY)

The Trimmed Mean Consumer Price Index (CPI), released by the Australian Bureau of Statistics , is a measure of underlying inflation. It is calculated as the weighted average of the central 70% of the quarterly price change distribution of all CPI components in order to smooth the data from the more-volable items. The quarterly CPI data series are calculated as the average of the three revelant monthly CPIs. The YoY reading compares prices in the reference quarter to the same quarter a year earlier. Generally, a high reading is seen as bullish for the Australian Dollar (AUD), while a low reading is seen as bearish.

Why it matters to traders?

The quarterly Consumer Price Index (CPI) published by the Australian Bureau of Statistics (ABS) has a significant impact on the market and the AUD valuation. The gauge is closely watched by the Reserve Bank of Australia (RBA), in order to achieve its inflation mandate, which has major monetary policy implications. Rising consumer prices tend to be AUD bullish, as the RBA could hike interest rates to maintain its inflation target. The data is released nearly 25 days after the quarter ends.