The AUD/JPY exchange remained in a consolidation phase on Friday after the mixed economic numbers from Japan. It was trading at 98.45, 9.205 higher than the lowest point this month.
Japan economic data
The AUD to JPY pair came into the spotlight earlier this month because of its popularity among carry trade investors.
For a long time, investors have used the interest rate differentials between Japan and Australia to make easy money.
In this, they borrowed money cheaply in Japan, which had negative interest rates, and then invested in high-yielding Australia.
This trend started fading recently as Japan started hiking interest rates. It raised them slightly by 0.10% in March followed by a bigger 0.25% increase this month.
In recent statements, officials from the central bank have hinted that they may hike again if inflation remains stubbornly high.
Odds of such a hike rose on Friday when the country published the latest inflation report. The core Consumer Price Index (CPI) data in Tokyo rose from 2.2% in July to 2.4% in August, higher than the median estimate of 2.2%.
The headline CPI jumped from 2.2% to 2.6%. Tokyo’s inflation numbers are important because of its big population. Therefore, the bank may decide to hike again in its attempt to lower inflation in the country.
The challenge of hiking rates is that the economy is not doing well. For example, the unemployment rate has risen from 2.5% in June to 2.7% in July, while the industrial production rose by 2.8%, lower than the expected 3.6%. Retail sales rose slowed from 3.8% to 2.6%.
Therefore, in such market conditions, there is a risk that more hikes will make the economy worse if the central bank continues its interest rate hikes.
RBA hawkish tone
The AUD/JPY exchange rate has also wavered as investors assessed the hawkish tone by the RBA even as commodity prices sunk.
In recent statements, the RBA governor, Michelle Bullock, has warned that the bank may consider increasing interest rates if inflation remains stubbornly high.
A report released this week revealed that the Consumer Price Index moved from 3.8% in June to 3.50% in July. The retreat was, nonetheless, higher than the median estimate of 3.40%.
Therefore, while most analysts don’t expect the bank to hike, there is a view that the RBA will be the last major central bank to start cutting rates.
A key risk for the Australian economy is that commodity prices like iron ore and coal have retreated sharply this year because of China’s oversupply and slow growth.
Also, hiking interest rates would make life more difficult for ordinary Australians, who are dealing with higher mortgage and borrowing costs.
Looking ahead, the next important dates to watch will be September 20th and 24th when the BoJ and the RBA will deliver their interest rate decisions.
AUD/JPY exchange rate analysis
Turning to the daily chart, we see that the AUD to JPY exchange rate peaked at 109.38 earlier this year as the Japanese yen crash accelerated. It then plunged to a multi-month low of 90.18, a 17.6% decline after the BoJ raised rates.
The pair then formed a giant hammer candlestick pattern leading to more upside to the current 98.47.
It is unclear whether the pair’s rebound will continue now that it is about to form a death cross pattern. A death cross happens when the 200-day and 50-day Exponential Moving Averages (EMA) cross each other and often leads to more downside.
The pair has also formed a small double-top chart pattern at 98.91 whose neckline was at 97.25. In most cases, the double-top often leads to more downside.
Therefore, there is a likelihood that the AUD/JPY exchange rate will resume the downward trend in the coming days. If this happens, it will drop to the next key support level at 97.25, its lowest swing on August 26.
A drop below that level will lead to more downside as traders target the next psychological level at 96. On the flip side, flipping the key resistance point at 98 will lead to more gains, with the next point to watch being at 100.
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