AUD/JPY trades around 95.00 after paring intraday gains

Source Fxstreet
  • AUD/JPY offers its daily profits following reports that China is preparing to cut rates on $5 trillion worth of mortgages.
  • Australia's Consumer Inflation Expectations eased to 4.4% in September, slightly down from the four-month high of 4.5% recorded in August.
  • BoJ board member Naoki Tamura stated that there is no predetermined plan for the pace of future rate hikes.

AUD/JPY trims its intraday gains, still trading higher around 95.10 during the European session on Thursday. The Australian Dollar (AUD) appreciated against its peers, driven by improved risk-on sentiment amid rising odds of the Federal Reserve (Fed) beginning its easing cycle with a 25-basis points interest rate cut in September.

However, the Aussie Dollar receives downward pressure as China, one of Australia's key trading partners, is reportedly set to cut interest rates on $5 trillion worth of mortgages as soon as this month. According to Bloomberg, several Chinese banks are already finalizing preparations for these mortgage rate adjustments, which could take effect as early as September.

Australia’s Consumer Inflation Expectations eased to 4.4% in September, down slightly from August's four-month high of 4.5%. This decline highlights the central bank's efforts to strike a balance between bringing inflation down within a reasonable timeframe and maintaining gains in the labor market.

The former Reserve Bank of Australia (RBA) Governor Bernie Fraser criticized the current RBA board for being overly focused on inflation at the expense of the job market. Fraser suggested that the Board should lower the cash rate, warning of "recessionary risks" that could have severe consequences for employment.

The Japanese Yen (JPY) remains subdued following the remarks from the Bank of Japan (BoJ) board member Naoki Tamura. Tamura stated that there is "no preset idea on the pace of further rate hikes." Unlike in the US and Europe, Japan's rate hikes are expected to proceed more gradually. The exact timing for when short-term rates in Japan might reach 1% will depend on the economic and price conditions at that time.

Interest rates FAQs

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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