AUD/JPY hovers above 2-week low after steep Australia CPI slowdown

Key points

AUD/JPY hovered above a fresh two-week low on Wednesday after a sudden slowdown in Australia’s inflation reinforced prospects for a pause on rates by the Reserve Bank of Australia at its July policy meeting.

Data showed on Wednesday that Australian annual CPI inflation had slowed to 5.6% in May from 6.8% in April. Market consensus had pointed to a slower drop to 6.1%.

It has been the lowest annual inflation reading since April 2022, mostly due to a softer growth in prices of both housing and transport.

Futures markets moved to price in a lower chance, 27%, that the RBA would need to hike interest rates next week.

“Today’s figures should push the balance in favour of pausing,” Paul Bloxham, chief economist for Australia and New Zealand at HSBC, was quoted as saying by Reuters.

“Although headline inflation is coming down, and underlying inflation is also falling, the pulse of inflation is still too high… In short, it’s too early to declare victory in the inflation fight, but the end is looking nearer.”

The yield on Australian 3-year government bonds dropped to 3.882%, while that on 10-year bonds went down to 3.885%.

Meanwhile, the Japanese Yen was trading at fresh lows against the Euro and the US Dollar, as Japanese authorities did not rule out intervention in the currency market to curb Yen depreciation.

“We are closely watching currency moves with a strong sense of urgency,” Japan’s top currency diplomat Masato Kanda told reporters earlier today. “We will respond appropriately if it becomes excessive.”

As of 9:34 GMT on Wednesday AUD/JPY was losing 0.80% to trade at 95.554. During the early phase of the Asian trading session, the minor Forex pair went down as low as 95.152. The latter has been the pair’s weakest level since June 15th (95.088).