AUD/JPY holds below 94.50 as traders await RBA rate decision
- AUD/JPY weakens to around 94.40 in Monday’s early European session.
- The RBA is widely anticipated to cut the cash rate by another quarter point on Tuesday.
- Japan's real wages fell 2.9% in May, the sharpest fall in nearly 2 years.
The AUD/JPY cross loses ground to near 94.40 during the early European session on Monday. The Australian Dollar (AUD) weakens against the Japanese Yen as the Reserve Bank of Australia (RBA) is widely expected to cut its Official Cash Rate (OCR) by another quarter point on Tuesday.
Markets anticipate the RBA to deliver a rate cut by 25 basis points (bps) at the July meeting on Tuesday amid a cooling in inflation and an uncertain growth outlook. This move would bring its OCR down to 3.60% from 3.85%. Traders in financial markets are now pricing in consecutive 25 bps rate reductions in July and August, followed by a third by November. "Forward guidance is expected to sound dovish, leaving the door open for further rate cuts into year-end,” said IG analyst Tony Sycamore. RBA rate cut bets might undermine the Aussie against the JPY in the near term.
US President Donald Trump said on Saturday that his administration is close to finalizing several trade deals in the coming days, while he will name some dozen countries later on Monday that are receiving letters with their new, higher levies. Trump added that the rates in the letters would go into effect August 1 and warned some could be as high as 70%. The renewed tariff concerns could boost the safe-haven flows, supporting the JPY against the Aussie.
On the other hand, government data showed Monday that Japan's real wages fell 2.9% in May from a year earlier as pay growth continued to lag behind persistent inflation. This figure registered the fifth consecutive monthly decline and the sharpest drop in nearly two years. This report could drag the JPY lower and create a tailwind for the cross.
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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