AUD/JPY gains ground above 96.50 as RBA cuts rate to 4.10% as expected
- AUD/JPY gains traction to near 96.55 in Tuesday’s Asian session.
- The RBA cut its OCR by 25 bps to 4.10% at the February meeting.
- Rising expectations for further BoJ rate rise might help limit the JPY’s losses.
The AUD/JPY cross attracts some buyers to around 96.55 during the early Asian session on Tuesday. The Australian Dollar (AUD) attracts some buyers after the Reserve Bank of Australia (RBA) interest rate decision.
As widely expected, the RBA board members decided to lower the Official Cash Rate (OCR) by 25 basis points (bps) from 4.35% to 4.10% at its February policy meeting on Tuesday. This marks the first rate cut in four years. In the absence of fresh dovish remarks, the Aussie strengthens against the Japanese Yen (JPY).
Additionally, US President Donald Trump's decision to delay the implementation of reciprocal tariffs contributes to the AUD’s upside. The process of Trump's ultimate tariff policies might take longer than many analysts had expected. Westpac analysts are leaning toward further gains in the AUD in the near term.
On the JPY’s front, the rising bets for more interest rate hikes by the Bank of Japan (BoJ) could lift the Japanese Yen (JPY) and create a headwind for AUD/JPY. Former BoJ official Nobuyasu Atago sees the chance of a hike at the April 30-May 1 meeting, given the BOJ's rising attention to the risk of an inflation overshoot.
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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