AUD/JPY sticks to intraday gains above mid-96.00s amid positive risk tone
- AUD/JPY prolongs its uptrend for the seventh straight day, though the upside seems limited.
- The upbeat market mood undermines the JPY’s relative safe-haven status against the Aussie.
- The divergent RBA-BoJ policy expectations warrant caution before positioning for further gains.
The AUD/JPY cross turns positive for the seventh straight day following an intraday dip to the 96.25 region on Wednesday and moves back closer to a one-week high touched the previous day. Spot prices climb to the 96.75 area during the first half of the European session, though the upside remains capped amid the divergent Reserve Bank of Australia (RBA)-Bank of Japan (BoJ) policy outlook.
The RBA slashed its outlook for economic growth in 2025 to 1.7% from 2.1% after lowering its cash rate for the third time in 2025, to the lowest since April 2023, on Tuesday, and said that cooling inflation will likely spur more rate cuts. Adding to this, RBA Governor Michele Bullock did not rule out back-to-back rate cuts. In contrast, the BoJ revised its inflation forecast at the end of the July meeting and reiterated that it will raise interest rates further if growth and inflation continue to advance in line with its estimates. This, in turn, could act as a tailwind for the AUD/JPY cross.
Meanwhile, data released this Wednesday showed that Japan's Corporate Goods Price Index (CGPI) climbed 2.6% in July from a year earlier, down from the previous month's 2.9%. This comes on top of a fall in Japan's real wages for the sixth straight month in June and fuels concern about a consumption-led recovery. Furthermore, the ruling Liberal Democratic Party’s loss in the upper house election on July 20 adds a layer of uncertainty amid concerns about the negative economic impact of higher US tariffs and suggests that the prospects for further BoJ policy normalization could be delayed.
This, along with the upbeat market mood, bolstered by an extension of the US-China trade truce and the US-Russia summit aimed at ending the war in Ukraine, might cap gains for the safe-haven JPY and benefit the risk-sensitive Aussie. Nevertheless, the aforementioned fundamental backdrop warrants some caution before placing fresh bullish bets around the AUD/JPY cross. The market attention now shifts to monthly employment details from Australia, due for release during the Asian session on Thursday, which should provide some meaningful impetus to the currency pair.
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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