AUD/JPY drops below 96.50, further downside appears due to potential BoJ rate hikes

• AUD/JPY depreciates amid rising odds that the BoJ will continue its rate-hiking cycle.
• BoJ Himino stated that the central bank would consider raising interest rates if economic conditions and inflation evolve as expected.
• The RBA could consider a rate cut in February amid easing inflationary pressures toward the end of 2024.

AUD/JPY declines for the second consecutive day, hovering around 96.30 during European trading hours on Thursday. The AUD/JPY cross's downside is driven by growing expectations that the Bank of Japan (BoJ) will continue its rate-hiking cycle.

The Japanese Yen (JPY) gained strength after BoJ Deputy Governor Ryozo Himino stated that the central bank would raise interest rates if economic conditions and inflation align with expectations. However, Himino also emphasized that the BoJ remains committed to maintaining an accommodative monetary stance for now, given prevailing domestic and external risks.

Minutes of the December Bank of Japan meeting released on Wednesday showed that members emphasized the need for cautious monetary policy adjustments. Meanwhile, investors are more confident that the BoJ will continue its move toward normalization and deliver additional interest rate hikes in 2025.

Moreover, the AUD/JPY cross's downside is reinforced by the subdued Australian Dollar (AUD) as easing inflationary pressures toward the end of 2024 have fueled speculation that the Reserve Bank of Australia (RBA) could consider a rate cut in February. The RBA maintained the Official Cash Rate (OCR) at 4.35% since November 2023, emphasizing that inflation must "sustainably" return to its 2%-3% target range before any policy easing.

ANZ, CBA, Westpac, and now National Australia Bank (NAB) all anticipate a 25 basis point (bps) rate cut from the Reserve Bank of Australia (RBA) in February. Previously, the NAB had forecasted a rate cut in May but has now moved its projection forward to the February RBA meeting.