AUD/JPY tumbles to near 98.50 as RBA cautious over future rate cuts
- AUD/JPY falls to around 98.65 in Tuesday’s Asian session, down 0.56% on the day.
- RBA intends for future policy decisions to be cautious and data-dependent, the Minutes showed.
- Japan’s political uncertainty could undermine the JPY, but verbal intervention might cap its downside.
The AUD/JPY cross slumps to near 98.65 during the Asian trading hours on Tuesday. Some verbal intervention from Japanese authorities provides some support for the Japanese Yen (JPY) against the Australian Dollar (AUD). Traders will take more cues from the Reserve Bank of Australia’s (RBA) Governor Michele Bullock speech later on Wednesday.
The minutes of the RBA’s September meeting, released on Tuesday, showed that the central bank remains cautious over future interest rate cuts amid sticky local inflation. The board members noted that the current policy is likely still a little restrictive. The RBA reiterated its data-dependent stance on future reduction, noting that it was also waiting to see the full effects of its monetary easing to be reflected in the economy.
The AUD edges slightly higher in an immediate reaction to the RBA Meeting Minutes but the cautious mood in the market cap the upside for the pair. Traders brace for China’s September Consumer Price Index (CPI) and Producer Price Index (PPI) reports for fresh impetus. Any signs of softer inflation in the Chinese economy could drag the China-proxy Aussie lower, as China is a major trading partner to Australia.
On the other hand, the expectations that political chaos in Japan could delay the Bank of Japan's (BoJ) rate hike plans might weigh on the JPY and create a tailwind for the cross. Traders continue to assess the path ahead for Japan's new Liberal Democratic Party leader, Sanae Takaichi, after Komeito quit the ruling coalition on Friday.
The downside for the JPY might be limited due to verbal intervention from Japanese officials. Japanese Finance Minister Katsunobu Kato said on Tuesday that he has recently seen one-sided and rapid moves in the foreign exchange. Kato added that it’s important for currencies to move in a stable manner reflecting fundamentals.
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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