AUD/JPY eyes downside below 96.00 despite soft Japan inflation and upbeat Aussie PMI

• AUD/JPY is expected to deliver more weakness below 96.00 as inflationary pressures in Japan have contributed to in-house demand.
• BoJ Noguchi also warned that the effect of costly imported goods could disappear around September.
• Aussie PMI has performed better than expectations but failed to support the Australian Dollar.

The AUD/JPY pair has displayed a sheer drop to near 96.00 in the early European session. Considering the strength in the downside momentum, the risk barometer is exposed to more downside despite Japan’s inflation having softened and the Australian preliminary S&P PMI (June) having remained upbeat.

AUD/JPY is following bearish cues from the AUD/USD pair amid the risk-aversion theme. The release of the upbeat Aussie PMI also failed to provide some support to the Australian Dollar. Manufacturing PMI landed at 48.6, higher than the expectations of 48.1 and the former release of 48.4. Also, Services PMI at 50.7 outperformed expectations of 50.1 but remained lower than the former release of 52.1.

Meanwhile, the Japanese Yen is performing better against the Australian Dollar despite softening of Japan’s inflation data (May). Headline inflation has decelerated to 3.2% while the street was estimating a further boost to 4.1%. Also, it remained lower than the former release of 3.5%. Core inflation that excludes volatile oil and food prices landed at 4.3%, marginally lower than the estimates of 4.4% but remained higher than the former release of 4.1%.

Scrutiny of Japan’s inflation report indicates that contribution from higher oil prices is fading and major inflationary pressure is coming from in-house demand, which would support for sustainability above the 2% benchmark.

The Bank of Japan (BoJ) is expected to continue its ultra-dovish stance as the impact of costly import prices is fading swiftly. This week, BoJ policymaker Asahi Noguchi also warned that the effect of costly imported goods could disappear around September. He further added central bank must continue lower interest rates to ensure inflation remains well-supported above 2% through higher wages.