AUD/JPY Trades With Modest Losses Amid Rumours That The Bank Of Japan Will Modify YCC in July

The AUD/JPY cross comes under some selling pressure during Friday's Asian session, halting its recovery from the monthly low reached this week in the 93.25-93.20 region. In the past hour, spot prices have dropped to a new daily low around 94.55 and appear to have ended a two-day winning streak.

Speculations that the Bank of Japan (BoJ) could alter its Yield Curve Control (YCC) policy as early as this month continue to support the Japanese Yen (JPY), which exerts some pressure on the AUD/JPY cross. In fact, according to former BoJ Executive Director Hideo Hayakawa, the policy "tweak" being contemplated is widening the band around zero for the 10-year Japanese Government Bond to 1% (from the current 0.5%).

In addition, Japanese media report that the BoJ is likely to increase its inflation forecast for FY2023, which has exceeded the 2% target for more than a year, which should put pressure on the central bank to begin tightening its ultra-lax monetary policy settings. In addition, a modest pullback in US equity futures benefits the safe-haven JPY and weighs on the risk-sensitive AUD, contributing to the offered tone of the AUD/JPY cross.

The downside, however, appears to be limited, at least for the time being, in light of expectations that China will announce additional stimulus measures to bolster its vulnerable domestic economy. China's Foreign Minister Wang Yi added that relations between China and Australia have stabilised, improved, and grown. This should bolster the China-proxy Australian Dollar (AUD) and function as a tailwind for the AUD/JPY cross.

Traders may also prefer to remain on the sidelines until Monday's Asian session, when the publication of key Chinese macro data is scheduled. In light of this, it would be prudent to await significant follow-through selling before positioning for the resumption of the recent decline from the June high of the year.