AUD/JPY recovers few pips from one-week low, finds support ahead of 100.00 mark
- AUD/JPY drifts lower for the second straight day and is pressured by a combination of factors.
- The RBA Minutes lacked hawkish signals and undermined the AUD amid a modest JPY uptick.
- Intervention fears offer some support to the JPY, though the BoJ Uncertainty might cap gains.
The AUD/JPY cross attracts sellers for the second consecutive day on Tuesday and retreats further from a one-year peak, around the 101.80 region, touched last week. The downward trajectory is sponsored by a combination of factors and drags spot prices closer to the 100.00 psychological mark or a one-week low during the Asian session.
The minutes of the Reserve Bank of Australia's (RBA) November meeting showed that policymakers were growing increasingly cautious over future interest rate cuts amid sticky inflation and signs of resilience in the labor market. The RBA, however, said that further policy easing is still possible if growth weakens. This, in turn, undermines the Australian Dollar (AUD), which, along with the emergence of some buying around the Japanese Yen (JPY), exerts downward pressure on the AUD/JPY cross.
The recent decline in the JPY prompted some verbal intervention from Japan’s Finance Minister Satsuki Katayama, saying that we have been alarmed by the recent one-sided, rapid moves in the foreign exchange market. This, along with the prevalent risk-off mood, benefits the JPY's relative safe-haven status against the perceived riskier Aussie and contributes to the AUD/JPY pair's downfall. However, the uncertainty around the Bank of Japan's (BoJ) tightening path could cap the upside for the JPY.
Nikkei Asia reported late Monday that Japan's Prime Minister Sanae Takaichi will launch tax-reform talks this week, aiming to cut certain taxes to stimulate investment and consumption. This adds to concerns about the government's long-term fiscal health. Furthermore, Japan's weak Q3 GDP print on Monday could put additional pressure on the BoJ to delay raising interest rates. This might hold back the JPY bulls from placing aggressive bets and help limit deeper losses for the AUD/JPY 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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