AUD/JPY trades with modest losses amid speculations that BoJ will tweak YCC in July

• AUD/JPY meets with some supply on Friday and snaps a two-day winning streak.
• Speculations that BoJ will tweak its YCC policy boost the JPY and exert pressure.
• The downside seems limited as the focus shifts to Chinese macro data on Monday.

The AUD/JPY cross comes under some selling pressure during the Asian session on Friday and stalls its recovery from the monthly low, around the 93.25-93.20 region touched earlier this week. Spot prices drop to a fresh daily low, around the 94.55 area in the last hour and for now, seem to have snapped a two-day winning streak.

The Japanese Yen (JPY) continues to draw support from growing speculations that the Bank of Japan (BoJ) could adjust its Yield Curve Control (YCC) policy as soon as this month, which, in turn, exerts some pressure on the AUD/JPY cross. In fact, former BoJ Executive Director Hideo Hayakawa said that widening the band around zero for the 10-year Japanese Government Bond to 1% (from currently 0.5%) is the policy 'tweak' being considered.

Furthermore, Japanese media report the BoJ is likely to raise its FY2023 inflation forecast, which has exceeded the 2% goal for more than a year, and should put pressure on the central bank to start unwinding its ultra-loose monetary policy settings. Apart from this, a modest pullback in the US equity futures further benefits the safe-haven JPY and weighs on the risk-sensitive Aussie, contributing to the offered tone surrounding the AUD/JPY cross.

The downside, however, seems limited, at least for now, in the wake of hopes that China will announce more stimulus measures to support the fragile domestic economy. Adding to this, China's Foreign Minister Wang Yi sounded optimistic and said that China-Australia relations have stabilised, improved and developed. This, in turn, should lend some support to the China-proxy Australian Dollar (AUD) and act as a tailwind for the AUD/JPY cross.

Traders might also prefer to move to the sidelines and wait for the release of the key Chinese macro data, scheduled during the Asian session on Monday. This further makes it prudent to wait for strong follow-through selling before positioning for the resumption of the recent slide from the YTD peak touched in June.

Technical levels to watch