AUD/JPY holds on to intraday gains above 97.00 amid modest JPY weakness

• AUD/JPY regains positive traction after pulling back overnight from over a week high.
• The RBA’s dovish stance, along with a risk-positive tone, supports the risk-sensitive Aussie.
• Geopolitical risks and BoJ rate cut bets are helping limit losses in the JPY, warranting caution for bulls.

The AUD/JPY cross is attracting some buyers for the second day in a row on Tuesday and remains within striking distance of a one-and-a-half-week peak around the 97.85 region reached the previous day. Spot prices are currently trading around the 97.15-97.20 region, up nearly 0.25% on the day and supported by a combination of factors.

The Australian dollar (AUD) continues to be supported by the Reserve Bank of Australia’s (RBA) stance, showing willingness to raise interest rates further to combat still-persistent inflation. In fact, RBA Governor Michele Bullock last week stressed the need to remain vigilant about inflation risks and said the central bank would not hesitate to tighten monetary policy again if necessary. This, along with a light tone around the Japanese yen (JPY), is proving to be a key factor acting as a tailwind for the AUD/JPY cross.

A former Bank of Japan (BoJ) board member, Makoto Sakurai, said on Monday that the central bank would not be able to hike again in 2024 and predicted an interest rate hike by March 2025. This comes on top of the recent remarks of the deputy governor of the BoJ. Shinichi Uchida, saying the central bank will not raise rates when markets are volatile. Apart from this, the bullish market mood weakens the safe-haven demand of the Japanese yen (JPY) and benefits the risk-sensitive Aussie, providing further support to the AUD/JPY cross.

That said, lingering geopolitical risks stemming from ongoing conflicts in the Middle East and the protracted Russia-Ukraine war should keep any market optimism in check. In addition, the BoJ’s summary of views from the July policy meeting, released last week, indicated that some members see room for further rate hikes and policy normalization, which should help limit deeper losses in the JPY and limit the cross AUD/JPY. This in turn calls for some caution before positioning for any further appreciation moves.