AUD/JPY falls back towards 82.50 after probing 83.00 level as fading risk appetite boosts yen

• AUD/JPY has dipped back towards 82.50 as US equity market sentiment deteriorated, confirming failure to break out of recent ranges.
• The Aussie was underpinned on Thursday by strong jobs data and China monetary policy easing.

Though the currency has pulled back from its earlier session highs in tandem with a pullback from high in the US equity market, the Aussie remains on course to finish Thursday’s trading session as the best performer in the G10. But as sentiment on Wall Street has deteriorated, the safe-haven yen has been climbing the G10 rankings. The net result for AUD/JPY is that the pair has pulled back to trade just above 82.50, where it trades higher by about 0.2% on the day, having at one point earlier in the session challenged the 83.00 level, where it at the time was trading about 0.6% higher.

The Aussie’s outperformance on Thursday came following a stronger than forecast December jobs report, which showed the economy adding 64.8K jobs on the month, well above the 43.3K expected. The unemployment rate also dropped sharply to 4.2% from 4.6%, a much larger drop than the expected decline to 4.5%. The data will come as a surprise to the RBA, who forecast that Australia would end 2021 with an unemployment rate of about 4.75% and that this wouldn’t fall to 4.2% until the end of 2022. The jobs report thus endorsed very hawkish market expectations for RBA interest rate policy – despite the RBA insisting last year that the conditions for a rate hike would not be met until 2023 at the earliest, futures price a 70% probability of lift-off in May.

The data also underpinned expectations that the bank will axe its QE programme in its entirety at the upcoming February meeting. Separately, China’s PBoC eased monetary policy settings with cuts to its one and five-year loan prime rates on Thursday, boosting hopes that the recent slowdown in Chinese growth will abate later in the year, boosting the outlook for Aussie exports. Despite the positive developments that underpinned the Aussie on Thursday, the day’s price action suggests confirmed that AUD/JPY is not yet ready to break out of the recent 82.00-83.00 range that has persisted since last Friday. If risk-appetite stabilises and FX markets are free to trade more as a function of central bank divergence, then a bullish breakout above 83.00, which would open the door to a move towards 84.00, remains very much on the cards.