AUD/JPY remains steady near 93.00, downside appears due to hawkish tone surrounding BoJ
- AUD/JPY may face challenges due to the rising odds of further rate cuts by the RBA.
- RBA Governor Michele Bullock called the rate cut decision proactive and a confidence booster for an unstable economy.
- The Japanese Yen continues to gain ground as the BoJ Deputy Governor Shinichi Uchida delivers hawkish comments regarding rate hikes.
AUD/JPY remains steady and is holding ground near 92.80 during the Asian trading hours on Wednesday. The currency cross depreciated by more than 0.50% in the previous session following the interest rate cuts from the Reserve Bank of Australia (RBA) and the People’s Bank of China (PBoC).
On Tuesday, the RBA delivered a 25 basis point rate cut, reducing its Official Cash Rate (OCR) from 4.1% to 3.85%. Moreover, the PBoC announced a reduction in its Loan Prime Rates (LPRs). The one-year LPR was lowered from 3.10% to 3.00%, while the five-year LPR was reduced from 3.60% to 3.50%.
The Aussie Dollar struggles as RBA Governor Michele Bullock stated that a rate cut by the central bank decision was a proactive move and boosted confidence that was suitable given the state of the economy. Bullock also mentioned that the Board is prepared to take additional action if necessary, raising the prospect of future changes.
The AUD was also affected against its peers by Australia's political unrest. Following the National Party's withdrawal from its collaboration with the Liberal Party, the opposition coalition disbanded. The ruling Labor Party, meanwhile, took advantage of the unrest and retook power with a more robust and expansive agenda.
The AUD/JPY cross may face downward momentum as the Japanese Yen (JPY) continues to attract buyers following the hawkish comments from the Bank of Japan (BoJ) Deputy Governor Shinichi Uchida earlier this week has raised the odds for further policy tightening by the central bank amid fears of broader and more entrenched price increases in Japan.
Apart from this, renewed US-China trade tensions revive safe-haven demand and provide an additional boost to the JPY. On Wednesday, China’s Commerce Ministry stated that US measures on China’s advanced chips are ‘typical of unilateral bullying and protectionism.’ Chinese authorities are looking further into whether the United States is serious about correcting its erroneous practices.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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