AUD/JPY approaches 94.00 as RBA needs more rate hikes to tame persistent inflation

• AUD/JPY is looking to reclaim 94.00 as more rate hikes by the RBA would widen RBA-BoJ policy divergence.
• Australia’s monthly CPI has rebounded to 6.8% in April as domestic demand has remained resilient.
• BoJ watchers are seeing no policy adjustments in June as BoJ Ueda is consistently supporting the need for monetary stimulus.

The AUD/JPY pair is marching towards the crucial resistance of 94.00 as investors are hoping that the Reserve Bank of Australia (RBA) would keep raising interest rates to tame stubborn inflation. The cross was consolidating in a narrow range of 93.00-93.50 for the past two trading sessions but has come outside of the woods as more interest rate hikes by RBA Governor Philip Lowe would widen the RBA-Bank of Japan (BoJ) policy divergence.

Australia’s monthly Consumer Price Index (CPI) has rebounded to 6.8% in April as domestic demand has remained resilient. RBA’s Lowe in his monetary policy statement announced that more rate hikes are appropriate to arrest sticky inflation.

A poll from Reuters showed that the RBA would raise its Official Cash Rate (OCR) further by 25 basis points (bps) to 4.35%.

Meanwhile, evidence of weak demand from China could put some pressure on the Australian Dollar. Monthly deflation in China has expanded by 0.2% in May vs. the consensus and the former release of 0.1%. The annual Producer Price Index (PPI) has contracted to 4.6% against the estimates of 4.3%. Firms are scaling down prices of goods and services due to weak domestic demand.

It is worth noting that Australia is the biggest trading partner of China and weak Chinese demand could put some significant pressure on the Australian Dollar.

The Japanese Yen has failed to fetch strength despite discussions over an exit from the ultra-dovish interest rate policy by Bank of Japan (BoJ) Governor Kazuo Ueda. About BoJ’s interest rate guidance, Bloomberg reported that BoJ watchers are seeing no policy adjustments in June as BoJ Ueda is consistently supporting the need of monetary stimulus to keep inflation steadily above 2%.