AUD/JPY holds gains above 96.00, upside seems limited due to Trump's tariff threats

AUD/JPY may lose ground as risk aversion rises, driven by renewed tariff threats from US President Donald Trump.
Trump stated that China would face tariffs, with his administration actively working on their implementation.
Tokyo's Consumer Price Index climbed to 3.4% YoY in January, reaching its highest level since April 2023.

AUD/JPY halts its two days of losses, trading around 96.00 during the Asian hours on Friday. However, the upside of the AUD/JPY cross could be restrained as the Australian Dollar (AUD) may struggle amid the increased likelihood of the Reserve Bank of Australia (RBA) rate cut in February.

The ASX 30-Day Interbank Cash Rate Futures February 2025 contract indicates a 95% expectation of a 25 basis point reduction in the cash rate to 4.35% at the central bank’s meeting on February 18. Additionally, ANZ, CBA, Westpac, and now National Australia Bank (NAB) all anticipate a 25 basis point (bps) rate cut from the RBA in February.

Additionally, the AUD could face challenges amid increased risk aversion US President Donald Trump reiterated his plan on Thursday to impose 25% tariffs on Canada and Mexico but did not specify a timeline for China. However, Trump stated that China would also face tariffs, with his administration actively working on their implementation.

Given China's significant trade relationship with Australia, any indication of a renewed US-China trade war could put downward pressure on the AUD. Trump also announced his threat on X (formerly Twitter) to levy 100% tariffs on BRICS nations if they attempt to introduce an alternative currency to challenge the US dollar in international trade.

The Japanese Yen (JPY) may strengthen as expectations for further interest rate hikes by the Bank of Japan (BoJ) grow, capping the upside of the AUD/JPY cross. On Friday, the Statistics Bureau of Japan reported that Tokyo's headline Consumer Price Index (CPI) rose to 3.4% year-over-year in January, from the previous 3.0% increase, marking its highest level since April 2023.

Additionally, core CPI, which excludes volatile fresh food prices, increased to 2.5% YoY, from 2.4% in December, reaching an 11-month high. Meanwhile, a core CPI measure that strips out both fresh food and energy prices edged up to 1.9% YoY in January from the previous 1.8%, staying close to the BoJ's 2% annual target.

Tariffs FAQs

What are tariffs?

Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.

What is the difference between taxes and tariffs?

Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.

Are tariffs good or bad?

There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.

What is US President Donald Trump’s tariff plan?

During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.