AUD/JPY rebound struggles below 92.00, RBA Interest Rate Decision in focus

• AUD/JPY struggles to defend the bounce off seven-week low.
• Sour sentiment ahead of the key RBA event challenge the pair’s rebound.
• RBA is expected to unveil 0.25% rate hike, future tightening of monetary policy will be in focus.
• Easing Covid woes, talks of BOJ’s exit from ultra-easy monetary policy act as additional catalysts.

AUD/JPY justifies its risk-barometer status as it fades the previous day’s rebound from a nearly four-month low, taking rounds to 91.60 during early Tuesday morning in Asia.

The cross-currency pair began the week on a firmer footing amid hopes of a faster recovery in China as multiple states from the Dragon nation announced an easing of the Covid-led activity restrictions. However, challenges for the Bank of Japan’s (BOJ) easy monetary policy appeared to have weighed on the pair afterward. It’s worth noting that the Reserve Bank of Australia (RBA) is up for announcing its latest monetary policy decision at 03:30 AM GMT on Tuesday and hence the AUD/JPY price remains sidelined ahead of the key event.

That said, Reuters reported on Monday that China is on course to downgrade its management of COVID-19 from a top-level Category A infectious disease to a less strict Category B disease as early as January. The news came after Chinese President XI Jinping termed the previous jump in the virus cases as Omicron and mostly of mild nature.

Additionally, doves at the Bank of Japan (BOJ) appear losing their previous status as talks of altering the inflation target and a gradual exit from the easy-money policies are taking rounds of late. The last week, Japanese media Asahi quotes Bank of Japan (BOJ) Board Member Naoki Tamura as saying, “The Bank of Japan should conduct a review of its monetary policy framework and the feasibility of its 2% inflation target.” However, BOJ Governor defended the policy status while saying, “A global economic slowdown has been observed, and Japan's inflation is expected to decelerate from 2023.”

Talking about the data, there wasn’t much from Japan but Australia’s AiG Performance of Construction Index for November rose to 48.2 versus 43.3 whereas S&P Global Services PMI rose more than 47.2 initial forecasts to 47.6 while the Composite PMI also improved to 48.0 versus 47.7 prior. Further, TD Securities Inflation for November jumped to 5.9% YoY and 1.0% MoM compared to 5.2% and 0.4% respective priors.

Additionally, China Caixin/S&P Global Services Purchasing Managers' Index (PMI) fell to 46.7 from 48.4, marking the third monthly contraction in a row. In doing so, the private services gauge also dropped lowest levels in six months.

It should be noted that the doubts over the Fed’s easy rate hike trajectory also recently challenged the market sentiment and weighed on the AUD/JPY prices.

That said, Wall Street closed in the red while the US 10-year Treasury yields rose eight basis points to 3.58% by the end of Monday’s North American session.

Looking forward, AUD/JPY may witness inaction ahead of the RBA’s verdict as traders doubt the latest hopes of witnessing an easy rate hike hopes from the Aussie central bank amid firmer data. It should be observed the that RBA is expected to announce a 25 basis point rate increase to 3.10% but the Monetary Policy Statement will be more important to watch for clear directions.

Technical analysis

Although a four-month-old ascending support line, around 91.00 by the press time, restricts immediate AUD/JPY downside, the pair buyers remain off the table unless witnessing a clear break of the 200-DMA hurdle, close to 93.00 at the latest.