AUD/JPY climbs to 94.35-94.40 resistance zone; upside potential seems limited
- AUD/JPY regains some positive traction following the previous day’s modest decline.
- A weaker USD benefits the AUD, while reduced BoJ rate cut bets weigh on the JPY.
- The divergent BoJ-RBA policy expectations warrant some caution for bullish traders.
The AUD/JPY cross is building on the overnight bounce from the 93.80 area and gaining some positive traction during the Asian session on Friday. Spot prices, however, remain confined within a multi-day-old range amid mixed fundamental cues and currently trade around the 94.35-94.40 horizontal resistance, up less than 0.10% for the day.
The Australian Dollar (AUD) benefits from a weaker US Dollar (USD) and draws additional support after the People’s Bank of China (PBOC) decided to leave its Loan Prime Rates (LPRs) unchanged. The Japanese Yen (JPY), on the other hand, struggles to attract any meaningful buyers despite hawkish expectations from the Bank of Japan (BoJ) and serves as a tailwind for the AUD/JPY cross.
Data released earlier today showed that Japan's annual National Consumer Price Index (CPI) remained well above the BoJ's 2% target in May. This reaffirms market bets that the central bank will hike interest rates again. Apart from this, persistent trade-related uncertainties, along with rising geopolitical tensions in the Middle East, lend some support to the safe-haven JPY.
In contrast, Thursday's disappointing Australian employment details pointed to signs of weakness in the labour market and backed the case for the next interest rate cut by the Reserve Bank of Australia (RBA) in July. This could hold back traders from placing aggressive bullish bets around the AUD and keep a lid on any further appreciating move for the AUD/JPY cross.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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