AUD/JPY climbs above 108.50 as RBA raises interest rate by 25 bps to 3.85%
- AUD/JPY attracts some buyers to near 108.85 in Tuesday’s Asian session.
- RBA raised its OCR by 25 bps to 3.85% at its February meeting, as expected.
- The latest comments from Japan’s Katayama could help limit the Japanese Yen’s losses.
The AUD/JPY cross rises to around 108.85 during the Asian trading hours on Tuesday. The Australian Dollar (AUD) strengthens against the Japanese Yen (JPY) after the Reserve Bank of Australia (RBA) interest rate decision. Traders will keep an eye on the RBA press conference later on Tuesday at 4:30 GMT for more cues about the interest rate outlook.
As widely expected, the RBA hiked rates for the first time in over two years. The Australian central bank decided to raise the Official Cash Rate (OCR) by 25 basis points (bps) to 3.85% from 3.60% at its first meeting of the year on Tuesday.
RBA Governor Michele Bullock is set to deliver a press conference explaining the monetary policy decision later in the day. Any hawkish remarks from policymakers could boost the Aussie against the Japanese Yen in the near term.
Japanese Prime Minister Sanae Takaichi has called for a snap general election on February 8. Political uncertainty ahead of the snap election and fiscal concerns on the back of Takaichi's reflationary policies could weigh on the JPY against the AUD.
On the other hand, intervention fears from Japanese authorities could provide some support to the Japanese Yen and act as a headwind for the cross. Japan’s Finance Minister Satsuki Katayama said on Tuesday that she will continue to closely coordinate with US authorities as needed, based on a joint Japan and US statement issued in September last year, and respond appropriately. Katayama also defended Takaichi's recent comments, highlighting the benefits of a weaker JPY, stating that the premier had referenced the impact of a weak JPY on the economy.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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