AUD/JPY rallies amid broadly weaker JPY, lacks follow-through beyond mid-96.00s

• AUD/JPY gains strong positive traction as domestic political uncertainty weighs heavily on the JPY.
• The risk-on impulse further undermines the safe-haven JPY and benefits the risk-sensitive Aussie.
• The US-Japan trade deal could limit JPY losses and keep a lid on the pair amid the RBA's dovish tilt. 

The AUD/JPY cross attracts fresh buying near the 95.85 area during the Asian session on Wednesday and builds on the previous day's modest recovery from a nearly two-week low. Spot prices, however, retreat a few pips from the daily peak touched in the last hour and currently trade around the 96.35 region, up 0.20% for the day.

The Japanese Yen (JPY) weakens across the board in reaction to reports that Japan's Prime Minister Shigeru Ishiba will resign by the end of August. This adds a layer of political uncertainty, which, along with the upbeat market mood, undermines the safe-haven JPY and assists the AUD/JPY cross to gain some positive traction for the second successive day. However, the optimism over the US-Japan trade deal holds back the JPY bears from placing aggressive bets and caps gains for the currency pair.

In fact, US President Donald Trump announced that his administration had completed a trade deal with Japan. Trump added that Japan will be subject to reciprocal tariffs of 15% and will open their country to trade, including cars and trucks, rice, and certain other agricultural products. This helps ease concerns about the potential economic fallout from higher US tariffs and limits deeper JPY losses. Apart from this, the Reserve Bank of Australia's (RBA) dovish tilt caps gains for the AUD/JPY cross. 

Minutes from the July RBA meeting released on Tuesday showed that three officials supported the need to cut interest rates as inflation is on track to return to the 2% target. Moreover, traders have become increasingly confident that the RBA will cut interest rates in August amid signs of easing labor market conditions. This, in turn, warrants some caution before placing fresh bullish bets around the AUD/JPY cross and positioning for the resumption of the recent well-established uptrend.