AUD/JPY Defies Fundamentals as Global Yields Take Center Stage

The AUD/JPY cross has been defying expectations by rising despite Japan's improving economic data and Australia's weakening fundamentals. According to ActionForex, this unexpected move is due to the global yield backdrop and carry differential, rather than either country's local economic performance.

Japan's recent inflation data showed a 0.2% increase in core CPI to 1.8%, while business activity strengthened with PMIs rising from 54.5 to 55.1. In contrast, Australia's jobs report was disappointing, with employment falling by 15.8K and unemployment rising to 4.5%. However, the AUD/JPY cross has continued to rise.

While a potential BoJ rate hike in September could narrow the interest rate gap between Japan and Australia, it would still leave a substantial spread of around 310bp. This means that even if the BoJ raises rates, the carry advantage for the Aussie will remain significant, allowing the AUD/JPY to continue rising.

Technically, the current rebound in AUD/JPY suggests that the correction from 114.91 has completed with three waves down to 109.25. The near-term outlook remains bullish as long as support holds at 112.21.