AUD/JPY declines to near 93.50 amid geopolitical risks
- AUD/JPY softens to near 93.55 in Thursday’s early European session.
- Geopolitical risks boost the Japanese Yen, a safe-haven currency.
- China granted a six-month limit on its ease of rare-earth export licenses.
The AUD/JPY cross trades in negative territory for the second consecutive day around 93.55 during the early European trading hours on Thursday. Rising geopolitical tensions in the Middle East boost the safe-haven flows, supporting the Japanese Yen (JPY). Japan’s April Industrial Production will be published on Friday.
On Wednesday, the United States is planning a partial evacuation of its Iraqi embassy and will allow military dependents to depart places around the Middle East, citing security risks in the region. Additionally, White House envoy Steve Witkoff is scheduled to meet Iranian Foreign Minister Abbas Araghchi in Muscat on Sunday and discuss the Iranian response to the recent US proposal, per Axios. Any signs of escalating geopolitical risks could underpin the JPY as investors seek more holdings in safe-haven assets.
On the Aussie front, optimism around the US-China trade deal could help limit the downside for the cross. Early Wednesday, the US and China agreed to a preliminary deal on how to implement the consensus the two sides reached in Geneva.
On the same day, the Wall Street Journal reported that China is putting a six-month limit on rare-earth export licenses for US automakers and manufacturers. Positive developments surrounding the world’s two largest economies might underpin the China-proxy AUD as China is a major trading partner of Australia.
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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