• AUD/JPY looking for a volatility expansion as RBA/BOJ policy divergence will expand further.
• It would be worth watching whether the RBA would return to 50 bps spell or continue 25 bps rate hike.
• The BOJ continued its ultra-loose monetary policy stance last week.

The AUD/JPY pair is displaying an extreme squeeze in volatility around 94.50 in the early Asian session. A sheer contraction in the volatility principle is generally followed by an expansion, which results in wider ticks and heavy volume.

Meanwhile, risk sentiment is upbeat as S&P500 remained solid on Friday, registering a weekly gain of around 4%.

Investors are shifting their focus toward the interest rate decision by the Reserve Bank of Australia (RBA), which is due on Tuesday. In October, RBA Governor Philip Lowe slowed down the pace of hiking the Official Cash Rate (OCR) to 25 basis points (bps), citing that the achievement of price stability should not dampen economic prospects to a great extent.

However, the recent release of the Consumer Price Index (CPI) at 7.3%, higher than the projections of 7.0%, and the prior release of 6.1% could force the Australian central bank to return to a bigger rate hike spell. A historic surge in inflationary pressures is highly required to be tamed sooner to support households against ever-rising price growth headwinds.

Economists at ANZ Bank cited that “A 50 bps rise in November is possible, but we think the RBA will prefer to hike more frequently than shift back to 50 bps, given the reasoning behind the decision to go 25 bps in October.”

On the Tokyo front, the continuation of the ultra-dovish stance on interest rates by the Bank of Japan (BOJ) didn’t bring a rally in the cross. No matter whether the rate hike by the RBA will be 25 or 50 bps, the Japanese yen could witness a sell-off as a rate hike will lead to more RBA/BOJ policy divergence.