RBA Rates Preview amp AUD JPY

Tonight’s RBA rate decision (Mon 22:30 ET, Tues 03:30 GMT) is widely expected to leave rates unchanged at 3.00% for the third consecutive month following 75-bps in rate cuts over the last nine months. The RBA’s attempt to talk down the Aussie without taking rate action worked mainly against US dollar due to the greenback’s broadening rally.

But the Aussie continued to firm against the euro, sterling, Canadian dollar and New Zealand dollar  over the past five weeks. So does it make sense to expect further gains in AUD/JPY ahead?

The yen part of the AUD/JPY cross is expected to continue supporting the pair, especially after Haruhito Kuroda has been officially appointed as new governor of the Bank of Japan. Kuroda wasted little time to show why both the ruling LDP and opposition parties give their full support. “I would like to make my stance clear that we will do whatever we can do” to raise Japan’s inflation rate from 0% to 2% over the next several years.

Extending the duration of the bond purchases beyond the existing three years would be among the measures adopted by the BoJ to reverse decades of deflation. Markets are complying so far. Yields on Japan’s five and 10-year government bonds have hit record lows at 0.12% and 0.60% respectively. This is creating an unfamiliar pattern, whereby both the yen and Japanese yields head lower. In the past, a falling yen was almost synonymous with higher Japanese yields as these followed global yields higher during. But PM Abe’s insistence to reverse deflation has proven to be a game-changer. And as the yen remains pressured, selling against the Aussie isn’t expected to change any time soon.

In Australia, last week’s release of the Australia’s new private capital expenditure showed a 1.2% decline to A$40.98 billion in Q4, disappointing expectations of 1.1% increase. But capex plans for 2013 were at A$152.5 bn, stronger than earlier estimates.  These were sufficiently strong to scale back expectations of a rate cut.

A decision to leave rates on hold without hints of keeping a dovish bias is likely to trigger a brief rally towards the 96.20s before gradually consolidating dating back towards 93.00 later this month, and stabilise atop the October trendine support. Traders must look out for whether the RBA statement leaves the scope for further easing even as it holds rates. This may quickly temper any knee-jerk reaction lower. In the case of an unlikely rate cut tonight, we may see AUD/JPY drop back to 93.50 until stabilisation emerges near 92.10-20.