AUD/JPY treads water above 98.50 due to cautious tone surrounding RBA policy stance

• AUD/JPY gained ground as RBA's Hunter signaled Q3 inflation may exceed forecasts.
• China's Consumer Price Index fell 0.3% YoY in September, against the expectations of a 0.1% decline.
• The upside of the currency cross was restrained amid increased safe-haven demand on US-China trade tensions.

AUD/JPY edges higher after registering nearly 0.75% losses in the previous session, trading around 98.60 during the European hours on Wednesday. The currency cross appreciates as the Australian Dollar (AUD) receives support from the cautious remarks from the Reserve Bank of Australia (RBA) Assistant Governor Sarah Hunter.

RBA Assistant Governor Hunter said on Wednesday that recent data has been a little stronger than expected, adding that inflation is likely to be stronger than forecast in the third quarter (Q3). Hunter also added that labor market and economic conditions might be tighter than assumed, and expected consumer momentum to soften a little in Q3. She highlighted that uncertainty about the global outlook remains elevated and stated that the board will adjust policy as appropriate as new information comes to hand.

The Australian Dollar moves little against its peers after the release of China's easing inflation data for September. Consumer Price Index (CPI) declined 0.3%, exceeding the market expectations of a 0.1% decline in the reported period. The previous inflation rate was -0.4% in August. Meanwhile, the monthly inflation rose to 0.1%, weaker than the expected 0.2% level. China's Producer Price Index (PPI) fell 2.3% YoY, following a 2.9% fall prior, as expected.

The upside of the AUD/JPY cross remained capped amid rising safe-haven demand, driven by the ongoing feud between the United States (US) and China. President Donald Trump criticized China on Wednesday for its recent protectionist trade policies, threatening additional targeted trade restrictions if China goes ahead with imposing fresh rare earth mineral export controls and additional port fees for foreign container ships in Chinese ports. Beijing also announced sanctions against five US-linked subsidiaries of South Korean shipbuilder Hanwha Ocean.

The Japanese Yen (JPY) may face challenges as traders adopt caution, while Japan's ruling Liberal Democratic Party leader, Sanae Takaichi, is set to become the next prime minister following the coalition's split with the Komeito party.

Japan's incoming Prime Minister Takaichi is known for her support of Abenomics-style expansionary policies, which have fueled expectations of increased fiscal spending and continued loose monetary policy. Meanwhile, opposition parties are holding discussions in an effort to secure enough support to form a new government.