AUD/JPY trades with modest gains above 98.00, remains confined in one-week-old range

• AUD/JPY regains positive on Wednesday amid the emergence of some JPY selling.
• The RBA’s hawkish stance and the BoJ rate-hike uncertainty remain supportive. 
• Geopolitical risks and a softer risk tone might keep a lid on any meaningful gains.

The AUD/JPY cross attracts some dip-buying during the Asian session on Wednesday and for now, seems to have stalled the previous day’s rejection slide from the 99.00 mark, or a nearly three-week top. Spot prices, however, remain confined in a narrow band held over the past week or so and currently trade around the 98.20 area, up just over 0.20% for the day. 

The Australian Dollar (AUD) continues to draw support from the Reserve Bank of Australia’s (RBA) hawkish stance, showing readiness to hike interest rates in the face of more upside risks to inflation. This, along with increasing chatters regarding big economic stimulus measures from China’s government, turns out to be another factor underpinning the China-proxy Aussie. Apart from this, the emergence of some selling around the Japanese Yen (JPY) assists the AUD/JPY cross to regain some positive traction.

Meanwhile, the political uncertainty led by Japanese Prime Minister Fumio Kishida’s decision to step down could lead to a pause in the Bank of Japan’s (BoJ) plan to raise interest rates steadily, which, in turn, is seen weighing on the JPY. Adding to this, government data released this Wednesday showed that Japan’s trade deficit ballooned to ¥621.84 billion in July amid a smaller-than-expected, 10.3% increase in exports and a 16.6% jump in exports, pushed up by a weaker yen rather than a robust increase in volume.

Investors, however, seem convinced that an improving macroeconomic environment in Japan should encourage the BoJ to raise interest rates again later this year. This, along with persistent geopolitical risks and a slight deterioration in the global risk sentiment, should help limit any meaningful JPY downfall and keep a lid on the AUD/JPY cross. This makes it prudent to wait for a convincing breakout through the short-term range before positioning for an extension of the recovery from over a one-year low touched this August.