AUD/JPY remains depressed above 112.50 as JPY recovers slightly on intervention fears
- AUD/JPY trades with a negative bias for the second straight day, though it lacks follow-through.
- Intervention speculations prompt some JPY short-covering and act as a headwind for the cross.
- The divergent BoJ-RBA policy expectations back the case for the emergence of some dip-buying.
The AUD/JPY cross remains on the back foot for the second consecutive day and trades just above mid-112.00s during the Asian session on Friday. Spot prices, however, lack bearish conviction, warranting some caution before positioning for an extension of this week's modest pullback from the vicinity of the 114.00 mark, or the highest level since 1990.
The Japanese Yen (JPY) reached levels that prompted the so-called rate checks in January, fueling speculations that authorities would step in to stem further weakness in the domestic currency. This turns out to be a key factor acting as a headwind for the AUD/JPY cross. However, reduced bets for an immediate rate hike by the Bank of Japan (BoJ) might hold back the JPY bulls from placing aggressive bets.
Given that Japan is one of the world's most energy-dependent nations, the recent surge in Crude Oil prices threatens to drive up consumer prices and weaken economic growth. This would create a classic stagflationary environment and complicate the BoJ's normalization efforts. In contrast, traders now seem convinced that the Reserve Bank of Australia (RBA) will hike interest rates as early as next week.
The aforementioned fundamental backdrop suggests that the path of least resistance for the AUD/JPY cross remains to the upside, and any further corrective slide is likely to be limited. Nevertheless, spot prices remain on track to register weekly gains as the focus now shifts to the crucial RBA meeting next Tuesday, which will be looked upon for cues about the policy outlook and provide a fresh impetus.
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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