AUD/JPY falls as RBA hold suggests tightening end

Key points

The Australian Dollar retreated against the Japanese Yen on Tuesday, after the Reserve Bank of Australia kept interest rates steady for a second consecutive month, which triggered speculation it might have reached the end of the current tightening cycle.

The RBA left its cash rate without change at 4.1% at its August meeting against market expectations of a 25 basis point rate hike.

Still, the RBA Board noted some further tightening of monetary policy might be required to ensure that inflation returns to the 2%-3% target range in a reasonable time frame.

The Board forecast Australia’s inflation would be around 3.25% by the end of 2024 and would return within the intended range in late 2025.

“With economic momentum waning, it seems unlikely the RBA will be presented with more compelling arguments to raise rates than they would have heard at today’s meeting,” Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia, commented.

“It looks increasingly likely that we have reached the peak of the cash rate cycle.”

Meanwhile, the Yen has been facing volatility since the Bank of Japan took another step toward a slow shift away from decades-long monetary stimulus.

The BoJ left its benchmark short-term interest rate without change at -0.10% at its Friday policy meeting and also kept a 0% cap on 10-year bond yields set under its yield curve control policy.

However, the central bank said it would offer to buy 10-year Japanese government bonds at 1% in fixed-rate operations, instead of 0.5% previously.

“Markets could test just how ‘flexible’ the BOJ will be in the months ahead,” Carlos Casanova, senior Asia economist at UBP, was quoted as saying by Reuters.

“As the new line in the sand is 1%, it would make sense to broaden the YCC band by this level.”

As of 7:27 GMT on Tuesday AUD/JPY was losing 0.66% to trade at 94.928. Last Friday, the minor Forex pair went down as low as 91.789. The latter has been the pair’s weakest level since June 2nd (91.114).