Australian Dollar Holds Gains As Higher Oil Prices Weigh On Japanese Yen

• AUD/JPY gains as higher oil prices increase Japan's import costs, putting heavy upward pressure on the Japanese Yen.

• BoJ tightening expectations, unwinding carry trades, and asset repatriation limit JPY’s downside.

• The Australian Dollar may further advance on RBA rate hike bets.

AUD/JPY gains ground for the second consecutive day, trading around 110.40 during European hours on Tuesday. The currency cross appreciates as the Japanese Yen (JPY) faces headwinds from rising global oil prices, which significantly inflate import costs for Japan's energy-dependent economy.

However, the upside of the AUD/JPY cross could be restrained as the Japanese Yen may gain support from anticipation of more aggressive monetary tightening by the Bank of Japan (BoJ), the ongoing unwinding of global carry trades, and subtle signs of domestic investors repatriating foreign assets, all of which provide a steady cushion for the currency.

The AUD/JPY cross may extend its upward trend as the Australian Dollar (AUD) gains support from market expectations of the Reserve Bank of Australia’s (RBA) rate hike later this month. Analysts at Rabobank highlight that the RBA has “just seen Andrew Hauser give a hawkish speech,” a shift that has “markets thinking of hikes this month and in November.” They note that this more restrictive stance is “very much what the US Treasury would like to see – plus a lot more action on non-housing parts of the economy,” underscoring how tighter RBA policy, particularly beyond the housing sector, is consistent with US policy preferences.

In Australia’s close trading partner China, Retail Sales rose 0.4% year-over-year (YoY) in August vs. a rise of 0.8% expected and a 0.6% growth in July. Industrial Production climbed 5.2% YoY in the same period, compared to the 4.8% forecast and 4.5% seen previously. Meanwhile, Fixed Asset Investment came in at -7.2% YoY in August, in line with the expected decrease of 7.2%. The July reading was a decline of 6.7%.