Australian Dollar gains against Japanese Yen as China CPI inflation rises in September

• AUD/JPY holds gains as Chinese September CPI rose 0.9% YoY and PPI surged past expectations to 5.0%.
• The Japanese Yen struggles as BoJ officials are leaning against implementing a rare back-to-back interest rate increase.
• Traders remain on high alert as speculation grows that Japanese authorities might intervene to support the struggling Yen.

AUD/JPY extends its gains for the second consecutive day, trading around 110.70 during Asian hours on Wednesday. The currency cross holds gains as the Australian Dollar (AUD) remains stronger following the release of Consumer Price Index (CPI) inflation data from China, Australia’s major trading partner.

China's National Bureau of Statistics reported that its annual CPI climbed 0.9% in September, up slightly from 0.8% in August, though coming in just below the market consensus of 1.0%. On a month-over-month basis, Chinese CPI rose 0.2% in September compared to a 0.4% increase previously, trailing the expected 0.3% growth. Meanwhile, China’s Producer Price Index (PPI) surged 5.0% year-over-year in September, accelerating from August's 3.8% increase and beating market expectations of 4.5%.

Analysts at Commerzbank highlight that the RBA’s latest communication carried an important message for FX markets. The central bank “expressed concern that a weaker AUD could contribute to elevated price pressures through imported inflation,” underscoring the currency’s role in the inflation outlook. Commerzbank also notes that, in the RBA’s view, “a rise in the global neutral interest rate could cause the AUD to depreciate if Australia’s neutral rate had not increased by a similar amount,” although the RBA “appeared to assume that it had,” suggesting policymakers believe domestic neutral rates have kept pace with global shifts.

Additionally, the AUD/JPY cross appreciates as the Japanese Yen (JPY) remains under pressure following reports that Bank of Japan (BoJ) officials are leaning against implementing a rare back-to-back interest rate increase.

However, the BoJ is still widely expected to stick to its broader policy normalization path. Furthermore, traders remain on high alert amid ongoing speculation that Japanese authorities could step in once again to intervene and prop up the Japanese Yen.

Analysts at MUFG/BTMU highlight that Prime Minister Takaichi reiterated in parliament that the US and Japanese finance ministers "are still in close contact on foreign exchange," noting that the Yen was raised as an issue at the latest US-Japan summit "in general terms." They point out that Takaichi also acknowledged that "the weak yen has both upsides and downsides," underscoring the policy trade-offs facing authorities. MUFG/BTMU add that the Yen has "remained at stronger levels since the joint US-Japan intervention in late July," which they argue "has proven effective at preventing further yen weakness in recent months."