Although the monthly CPI shows further cooling, the trimmed mean inflation, which is the RBA's biggest concern, remains above their 2-3% target. This signals that an early rate cut is unlikely. Additionally, China's recent stimulus will likely support the AUD. On the other hand, despite hawkish candidate Ishiba being elected as Japan's new Prime Minister, recent comments from BoJ Governor Ueda indicate that a rate hike is not imminent, suggesting the yen's bullish momentum from this political shift may be short-lived.

AUD: Helped by China

The recent measures announced by the People’s Bank of China (PBoC) to support the country’s economic recovery—such as a cut in the 7-day reverse repo rate and a reduction in the required reserve ratio (RRR)—have provided a modest boost to the Australian dollar (AUD), given Australia’s strong trade connections with China. Additionally, rising iron ore prices have further strengthened the currency. Domestically, the Reserve Bank of Australia (RBA) held its cash rate steady at 4.35% while adopting a hawkish stance, reinforcing support for the AUD. The RBA has reiterated its commitment to bringing inflation sustainably within its target band of 2-3%, indicating that it will disregard temporary declines in headline inflation resulting from government cost-of-living relief measures. Investors are encouraged to focus on trimmed mean inflation as a crucial indicator of inflation momentum, with data on this metric expected to be released mid-week.

While the recent monthly Consumer Price Index (CPI) indicated a cooling in inflation, it has not altered the current outlook for the AUD, as the RBA has signaled that it will prioritize trimmed mean inflation, which remains above the target range 2%-3%. The RBA is not anticipated to cut rates before February 2025, as it seeks a more sustained decline in inflation. Nevertheless, with real interest rates in Australia among the highest in major developed markets and the RBA remaining one of the most hawkish central banks (excluding Japan), the AUD is expected to maintain its support into the fourth quarter. Overall, considering the stimulus plans from China and the RBA’s hawkish position, the AUD may continue to appreciate, provided there are no negative developments from domestic sources or China.

JPY: New Prime Minister

The yen's gradual strengthening is progressing in the right direction but at a slower pace than market expectations, largely due to the ongoing expansion in the U.S. economy and the reduced likelihood of an imminent recession. A rapid yen appreciation would undermine the Bank of Japan's (BoJ) goal of achieving sustained positive inflation. BoJ Governor Kazuo Ueda recently reiterated that the bank is in no rush to raise rates and will take time to assess domestic developments, which contributed to pushing USD/JPY higher. This aligns with his previous dovish comments, indicating that upside risks to inflation are easing, reducing speculation of a rate hike at the upcoming 31 October BoJ meeting. Absent any major surprises in U.S. data, the likelihood of USD/JPY dropping below 140 in the near term appears low. Instead, with a gradual Fed recalibration and the BoJ likely tightening only in 2025, USD/JPY may rise in the short term.

In addition, Shigeru Ishiba has won the LDP leadership race and will become Japan’s next prime minister, which is positive news for yen bulls. Ishiba, known for supporting continued BoJ rate hikes, could further bolster expectations for a stronger yen. However, given Ueda’s recent comments that a near-term hike is unlikely, the bullish momentum for the yen from this political shift may be short-lived.

Looking ahead, Japan's Tankan survey, industrial production, and retail sales data will be crucial for the yen, potentially indicating that the economy is not yet ready for further rate hikes. However, the most important driver for the yen in the coming week will be U.S. economic data, particularly labor market figures. Strong U.S. data could reduce expectations of steep Fed rate cuts, weighing on the yen. Investors should also keep an eye on U.S. presidential election opinion polls, as a surge in Kamala Harris' odds could also support a USD/JPY bounce.