AUD/JPY gains on strong Australia retail sales, but upside seen capped

The AUD/JPY currency pair firmed at the start of a busy central bank and data-laden week, as upbeat Australian retail sales data reinforced the case for a RBA interest rate hike in November.

Yet, global risk sentiment remained fragile, while limiting the Aussie dollar upside, with the geopolitical backdrop in the Middle East a dominant factor.

Heavy air and artillery strikes in northern Gaza were reported early on Monday, while Israel launched a ground assault into the enclave that led to more international calls for protection of civilians.

In Australia, preliminary data showed that retail sales had risen 0.9% month-over-month in September, while picking up from a revised up 0.3% growth in August.

It has been the sharpest monthly increase in retail turnover since January, as department store sales rose the most due to a warmer-than-usual start to the spring season.

Markets are now pricing a 61% chance of a rate hike by the Reserve Bank of Australia at its policy meeting next week.

“The September retail data today reinforces our view the economy is surprisingly resilient, and adds to the case to hike in Nov-23,” UBS analysts wrote in a client note.

“Indeed, if this continues, it adds to the risk of an additional RBA hike of 25bps to 4.60% in Feb-24.”

Meanwhile, traders’ focus now sets on the outcome of the Bank of Japan’s two-day monetary policy meeting, with a decision due on Tuesday.

“The BOJ meeting will be the most interesting one (given) heightened speculation over a policy tweak at this meeting,” Carol Kong, currency strategist at Commonwealth Bank of Australia, was quoted as saying by Reuters.

“Our base case remains that the BOJ will leave its monetary policy settings unchanged, although we acknowledge that there is a risk that they will announce tweaks to its yield curve control programme,” Kong noted.

Yen traders will be also paying attention to an upcoming set of Japanese macro data, including unemployment, retail sales and industrial production figures for September.

Japan’s rate of unemployment probably eased to 2.6% last month, according to a consensus of analyst estimates, from 2.7% in August.

As of 8:05 GMT on Monday AUD/JPY was edging up 0.36% to trade at 95.048.