AUD/JPY gathers strength above 100.00 on hot Australian CPI inflation data
- AUD/JPY gains ground around 100.30 in Wednesday’s Asian session.
- Australia’s CPI inflation rose to 1.3% QoQ in Q3, hotter than expected.
- The BoJ is widely expected to keep its policy rate steady at the October meeting on Thursday.
The AUD/JPY cross trades in positive territory near 100.30 during the Asian trading hours on Wednesday. The Australian Dollar (AUD) strengthens against the Japanese Yen (JPY) on the hotter-than-expected Australian inflation data. The Bank of Japan (BoJ) interest rate decision will take center stage later on Thursday.
Data released by the Australian Bureau of Statistics (ABS) on Wednesday showed that Australia’s Consumer Price Index (CPI) rose 1.3% QoQ in the third quarter (Q3), compared with the 0.7% increase recorded in Q2. This figure came in above the market consensus of a 1.1% growth.
Meanwhile, Australia’s CPI inflation climbed to 3.2% YoY in Q3 versus 2.1% prior and hotter than the 3.0% expected. The monthly Consumer Price Index rose by 3.5% YoY in August, compared to the previous reading of a 3.0% increase. This figure exceeded analyst expectations of 3.1%.
The Aussie edges slightly higher in an immediate reaction to the hotter Australian CPI inflation report, as it might reduce the chance of a near-term interest rate cut by the Reserve Bank of Australia (RBA).
On the other hand, the comments from Japan’s Prime Minister Sanae Takaichi and US Treasury Secretary Scott Bessent eased some concerns about more expansionary fiscal and monetary policy in the country. This, in turn, could provide some support to the JPY. US Treasury Secretary Scott Bessent said on Wednesday that the government’s willingness to allow the BoJ policy space will be key to anchoring inflation expectations and avoiding excess foreign exchange (FX) volatility.
The BoJ is broadly expected to hold its interest rate steady at 0.5% at its upcoming policy meeting on Thursday. Traders will closely monitor the guidance from BoJ Governor Kazuo Ueda following the meeting for fresh impetus.
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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