AUD/JPY drops heavily below 88.40 on mixed Australian Inflation, BoJ policy eyed

• AUD/JPY has surrendered the crucial support of 88.40 despite Australian Inflation data missed estimates.
• A further softening of Australian inflation will allow the RBA to keep rates steady.
• BoJ Ueda needs to continue the expansionary monetary policy to trigger domestic demand.

The AUD/JPY pair has slipped sharply below 88.40 despite the Australian Consumer Price Index (CPI) data having landed higher than estimates but has remained lower than prior releases. The Australian Bureau of Statistics has reported that quarterly CPI (Q1) has accelerated by 1.4% at a higher pace as expected by the market participants but lower than the former pace of 1.9%. Annual inflation has softened to 7.0%, a little higher than the estimates of 6.9% but lower than the prior release of 7.8%.

The monthly CPI indicator which has already softened heavily from its peak of 8.4% recorded in December has decelerated further to 6.1% from the consensus of 6.6% and the previous release of 6.8%.

A significant deceleration in Australian inflation is going to support the Reserve Bank of Australia (RBA) to stay with the decision of keeping interest rates unchanged at 3.60%, as announced in April’s monetary policy meeting. Therefore, the odds of maintenance of a status quo by the RBA in its May policy meeting are extremely high.

On the Japanese Yen front, the interest rate decision from the Bank of Japan (BoJ), scheduled for Friday will be the key event. To assure inflation above 2%, new BoJ Governor Kazuo Ueda needs to continue the expansionary monetary policy to trigger the domestic demand. BoJ Ueda cited on Monday that the impact of higher import prices has been passed on in the economy more than anticipated, therefore, to keep inflationary pressures steady a continuation of ultra-loose monetary policy is highly required.