AUD/JPY retreats further from one-year top; trades below mid-101.00s amid rebounding JPY

• AUD/JPY attracts some sellers for the second straight day amid a firmer JPY.
• Japan’s CPI print keeps hopes alive for further rate hikes and benefits the JPY.
• Fiscal concerns cap the JPY and support the cross amid the RBA’s hawkish tilt.

The AUD/JPY cross turns lower for the second straight day on Friday, following a modest Asian session uptick to the 101.65 area and moves further away from a one-year peak, touched the previous day. Spot prices currently trade around the 101.30-101.25 region amid the emergence of some buying around the Japanese Yen (JPY), though the downside potential seems limited.

Data released earlier today showed that inflation in Japan remains sticky and well above the Bank of Japan's (BoJ) 2% target. This keeps alive hopes for a near-term interest rate hike and provides some respite to the JPY bulls. Moreover, comments from Japan's Finance Minister Satsuki Katayama sparked speculations that authorities would step in to stem further weakness in the domestic currency. This, along with a weaker tone around the equity markets, contributes to the safe-haven JPY's relative outperformance against the perceived riskier Australian Dollar (AUD).

Japan's cabinet approved a ¥21.3 trillion economic stimulus plan, the first significant policy initiative under Prime Minister Sanae Takaichi. This adds to worries about Japan's ailing fiscal position and the supply of new government debt, which led to a sharp steepening of Japan's yield curve recently and keeps borrowing costs elevated near the highest level in decades. Furthermore, Takaichi’s preference for interest rates to stay low continues to fuel uncertainty about the BoJ's policy tightening path and is holding back the JPY bulls from placing aggressive bets.

The AUD, on the other hand, draws some support from the Reserve Bank of Australia's (RBA) hawkish tilt and might further contribute to limiting the downside for the AUD/JPY cross. In fact, Minutes from the November RBA meeting, released earlier this week, showed that policymakers were growing increasingly cautious over future interest rate cuts amid sticky inflation and signs of resilience in the labor market. The central bank also signalled that it would only entertain cutting interest rates if there was a material deterioration in the labour market.

This reflects a cautious approach amid the lack of clarity around the effect of the recent policy action on the economy, further dampening chances of interest rate cuts. Hence, it will be prudent to wait for strong follow-through selling before confirming that the AUD/JPY cross has topped out in the near-term and positioning for any meaningful corrective decline. Nevertheless, spot prices seem poised to register modest gains for the second straight week, also marking the fourth week of a positive close in the previous five.