AUD/JPY weakens below 103.50 as RBA leaves interest rate unchanged at 3.6%
- AUD/JPY edges lower to around 103.20 in Tuesday’s early Asian session.
- RBA left its OCR unchanged at 3.6% at its December meeting on Wednesday.
- Analysts said the BoJ could delay an expected rate hike next week.
The AUD/JPY cross loses momentum to near 103.20 during the Asian trading hours on Tuesday. The Australian Dollar (AUD) edges lower against the Greenback after the Reserve Bank of Australia (RBA) interest rate decision. Traders will keep an eye on the Bank of Japan Governor Kazuo Ueda's speech later on Tuesday.
As widely expected, the RBA decided to hold its Official Cash Rate (OCR) steady at 3.6% following the conclusion of the December monetary policy meeting on Tuesday. The Australian central bank stated that some of the recent increase in underlying inflation may be due to temporary factors, but the data suggested a more broadly based pick-up in inflation that needs close monitoring. The RBA added that it was appropriate to remain cautious, updating its view of the outlook as the data evolves.
On the other hand, news of the earthquake in Japan could weigh on the Japanese Yen and create a tailwind for the cross. Traders continue to assess the potential impact of a strong earthquake in Japan. Analysts said that depending on the extent of the earthquake's damage, the Japanese central bank could delay an expected rate hike next week. The upcoming BoJ monetary policy meeting is scheduled for December 18-19.
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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