AUD/JPY Gains Amplified Ahead of RBA

A decent US manufacturing report and continued unwind of the 'taper tantrum' lent a bid to risk trades on the first trading day of Q3. The Australian dollar was the top performer while the yen lagged. The RBA is expected to hold rates at 2.75% at today's meeting but clues about future policy moves will be critical. We added 2 new Premium trades in USDJPY with daily and weekly charts as well as 2 new trades in USDCHF after the 3 longs from June 20 hit all targets. All these can be seen in the latest Premium Insights.

The ISM manufacturing index improved in June, climbing to 50.9 from 49.0 and beating the 50.6 consensus. The good news was partially blunted as the employment index slipped to 48.7 from 50.1 in the first sub-50 reading since Sept 2009.

The overarching theme was yen weakness as risk trades improved. The S&P 500 gained 0.6%, largely on flows due to the new month. USD/JPY climbed as high as 99.86 then backed off to 99.58.

The Australian dollar is in the spotlight ahead of the RBA decision at 0430 GMT. A relief rally boosted AUD/USD to 0.9229 from a cycle low of 0.9113 on Friday.

AUD/JPY climbed to a two-week high of 92.24 and is showing signs of carving out a bottom, at least temporarily. The pair plunged more than 1200 pips in May and early June and even a modest bounce would stretch to 0.9400 and relieve oversold conditions.

The latest thinking on the RBA is that a cut is unlikely after the recent fall in the Australian dollar. The quick drop immediately makes commodity inflation a factor and it could spread to consumer goods. The final line of the statement will be key.

The June 4 statement said: “The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand.” The Aussie fell hard on the dovish bias with AUD/JPY sinking more than 200 pips that day and continuing lower for several days afterwards. If the easing bias is erased, look for AUD to rebound significantly.