Australian Dollar gains ground against Japanese Yen, intervention risk looms
- AUD/JPY gathers strength to around 113.55 in Monday’s early European session.
- Markets have priced in nearly a 16% expectation of an interest rate increase to 4.60% at the next RBA meeting.
- Traders are on alert for Japanese Yen intervention.
The AUD/JPY cross gains ground to near 113.55 during the early European session on Monday. The Australian Dollar (AUD) edges higher against the Japanese Yen (JPY) due to the interest rate differential between the Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ). However, fears of possible intervention from Japanese officials might cap the upside for the cross.
After delivering three consecutive 25 basis points (bps) hikes earlier this year, the RBA decided to hold the Official Cash Rate (OCR) steady at 4.35% at its June policy meeting. The Australian central bank is currently in a "wait-and-see" mode to evaluate how its tightening cycle is impacting sticky core inflation and a cooling domestic economy.
The ASX 30-Day Interbank Cash Rate Futures implied a 16% odds of an RBA rate hike in August, with a roughly 50% to 60% chance of one more hike by December 2026.
Traders remain on alert for potential intervention from Japanese authorities. Japan’s Finance Minister Satsuki Katayama said on Friday that "if it becomes necessary, we will take decisive action at any time.”
The Japanese central bank will meet later this month after hiking interest rates to the highest level in three decades in June. The BoJ is likely to raise rates again before the end of the year, but it isn’t seen moving at the July policy meeting.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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