Australian Dollar holds gains as higher oil prices weigh on Japanese Yen
- AUD/JPY gains as higher oil prices increase Japan's import costs, putting heavy upward pressure on the Japanese Yen.
- BoJ tightening expectations, unwinding carry trades, and asset repatriation limit JPY’s downside.
- The Australian Dollar may further advance on RBA rate hike bets.
AUD/JPY gains ground for the second consecutive day, trading around 110.40 during European hours on Tuesday. The currency cross appreciates as the Japanese Yen (JPY) faces headwinds from rising global oil prices, which significantly inflate import costs for Japan's energy-dependent economy.
However, the upside of the AUD/JPY cross could be restrained as the Japanese Yen may gain support from anticipation of more aggressive monetary tightening by the Bank of Japan (BoJ), the ongoing unwinding of global carry trades, and subtle signs of domestic investors repatriating foreign assets, all of which provide a steady cushion for the currency.
The AUD/JPY cross may extend its upward trend as the Australian Dollar (AUD) gains support from market expectations of the Reserve Bank of Australia’s (RBA) rate hike later this month. Analysts at Rabobank highlight that the RBA has “just seen Andrew Hauser give a hawkish speech,” a shift that has “markets thinking of hikes this month and in November.” They note that this more restrictive stance is “very much what the US Treasury would like to see – plus a lot more action on non-housing parts of the economy,” underscoring how tighter RBA policy, particularly beyond the housing sector, is consistent with US policy preferences.
In Australia’s close trading partner China, Retail Sales rose 0.4% year-over-year (YoY) in August vs. a rise of 0.8% expected and a 0.6% growth in July. Industrial Production climbed 5.2% YoY in the same period, compared to the 4.8% forecast and 4.5% seen previously. Meanwhile, Fixed Asset Investment came in at -7.2% YoY in August, in line with the expected decrease of 7.2%. The July reading was a decline of 6.7%.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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