AUD/JPY rises above 98.50 due to rising odds of RBA maintaining a restrictive policy

• AUD/JPY receives support from the hawkish sentiment surrounding the RBA's policy outlook.
• The risk-sensitive AUD appreciates due to improved market sentiment amid dovish sentiment surrounding the Fed's interest rates trajectory.
• The Japanese Yen struggles as upcoming PM Shigeru Ishiba says that the monetary policy should continue to be accommodative.

AUD/JPY gains ground, trading around 98.70 during the European session on Monday. This upside of the AUD/JPY cross is attributed to the Reserve Bank of Australia's (RBA) hawkish stance contributing support to the Australian Dollar (AUD). The RBA kept its cash rate at 4.35% for a seventh consecutive meeting and stated that the policy would need to stay restrictive to ensure inflation slowed.

The AUD remains stronger despite the mixed Manufacturing Purchasing Managers' Index (PMI) data from China, Australia's largest trading partner. China's Caixin Manufacturing PMI fell to 49.3 in September, indicating contraction, down from 50.4 in August. Meanwhile, China's NBS Manufacturing PMI improved to 49.8, up from 49.1 in the previous month and surpassing the market consensus of 49.5.

Additionally, the rising expectations that the US Federal Reserve (Fed) may continue its policy easing in November is improving the market sentiment and contributing support for the risk-sensitive Australian Dollar. The CME FedWatch Tool indicates that markets are assigning a 55.9% probability to a 25 basis point rate cut by the Federal Reserve in November.

The Japanese Yen (JPY) receives downward pressure due to the dovish comments from Japan's upcoming Prime Minister, former Defense Chief Shigeru Ishiba. Ishiba stated on Sunday that the country's monetary policy should continue to be accommodative, indicating the necessity of maintaining low borrowing costs to support a fragile economic recovery, according to The Japan Times.

On Monday, Japan's Retail Trade increased by 2.8% year-on-year in August, surpassing market expectations of 2.3% and slightly exceeding the upwardly revised 2.7% rise from the previous month. On a month-over-month basis, seasonally adjusted Retail Trade rose by 0.8%, marking the largest increase in three months, following a 0.2% gain in July.

Japan's Chief Cabinet Secretary, Yoshimasa Hayashi, refrained from commenting on Monday's daily stock market fluctuations. Hayashi emphasized the importance of closely monitoring the economic and financial situation both domestically and internationally with a sense of urgency. He also noted the need for ongoing collaboration with the Bank of Japan.