AUD/JPY recovers further from over two-week low, lacks bullish conviction
- AUD/JPY snaps a three-day losing streak to over a two-week low touched on Monday.
- The risk-on environment undermines the safe-haven JPY and lends support to the cross.
- Intervention fears, along with China’s economic woes, might cap any meaningful gains.
The AUD/JPY cross attracts some buyers during the Asian session on Tuesday and moves away from over a two-week low, around the 106.55 area touched the previous day. Spot prices climb back above the 107.00 mark in the last hour and for now, seem to have snapped a three-day losing streak amid the emergence of fresh selling around the Japanese Yen (JPY).
The prevalent risk-on environment – as depicted by an extension of a runaway rally across the global equity markets – is seen as a key factor undermining the JPY's relative safe-haven status. Apart from this, the JPY depreciating move lacks any obvious catalyst and is likely to remain cushioned in the wake of speculations that Japanese authorities might intervene in the markets to prop up the domestic currency.
In fact, Japanese Chief Cabinet Secretary Yoshimasa Hayashi was out with some verbal intervention earlier this Tuesday and showed readiness to employ all available measures regarding forex. This comes on top of speculations that the Bank of Japan (BoJ) may raise interest rates in response to a weakening domestic currency should act as a tailwind for the JPY, warranting some caution for the AUD/JPY bulls.
Apart from this, concerns about a slowdown Chinese economy – the world's second-largest economy – seem to weigh on the China-proxy Australian Dollar (AUD) and might cap the AUD/JPY cross. The market worries resurfaced after the official data released on Monday showed that China's economy grew by 4.7% over the year during the second quarter of 2024 as compared to the 5.3% rise in the previous quarter.
Hence, it will be prudent to wait for strong follow-through buying before confirming that the recent corrective slide from the highest level since May 1991, around the 109.35 region touched last Thursday, has run its course and positioning for any further appreciating move. Traders now look forward to the release of the monthly Australian employment details for some meaningful impetus on Thursday.
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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