AUD/JPY back to 83.50 mark as Aussie rallies in tandem with base metals and energy prices

• AUD/JPY recovered back to the 83.50 area on Wednesday as the Aussie benefitted disproportionately amid USD weakness.
• A surge in base and industrial metal, as well as energy prices, disproportionately benefitted the currency of export-dependent Australia.

AUD/JPY rallied 0.4% to close to the 83.50 mark on Wednesday as a sharp deterioration in the US dollar fortunes triggered outperformance in risk-sensitive currencies across the board. Though the yen also gained a solid 0.6% on the day versus the battered buck, it could not keep pace with the Aussie, which soured over 1.0% on the session versus the dollar, hence the move higher in AUD/JPY. The pair has now reversed more than 1.3% higher versus Monday’s sub-82.50 lows and has thus pared slightly more than half of the pullback from last week’s 84.30ish highs to Monday’s lows.

The dollar’s sharp post-US Consumer Price Inflation data decline, which occurred despite the report revealing headline inflation hitting its highest levels since 1982 at 7.0% YoY and prompted hawkish Fed member James Bullard to overtly call for four hikes in 2022 (the first Fed member to do so), spurred a rally in industrial metals. Copper was last up nearly 3.0% on the session, whilst the Bloomberg Industrial Metals Subindex, which tracks prices in copper, nickel, aluminium and zinc, was up closer to 1.5%. This, coupled with sharp upside in crude oil and US natural gas prices, benefitted the currencies of commodity and energy export-dependent countries like Australia.

Note that commodities (particularly the base metals) are also getting a boost after the latest inflation data out of China came in cooler than expected, which gives the PBoC and Chinese authorities to support growth this year. If dollar weakness and commodity price strength can continue like this for a few more sessions, AUD/JPY is in with a decent shout of recovering back to last week’s highs above the 84.00 mark. The big risk to this call would be if something happens that hurt risk appetite once again, just as happened last week when risk assets tumbled amid Fed tightening fears.