AUD/JPY edges higher to near 95.50 as RBA holds cash rate steady at 3.85%
- AUD/JPY holds positive ground to around 95.50 in Tuesday’s Asian session.
- The RBA unexpectedly holds its OCR steady at 3.85% at the July meeting.
- Trump said Japan would face tariffs of 25% unless it reached an agreement with the US.
The AUD/JPY cross gathers strength to near 95.50 during the early Asian trading hours on Tuesday. The Australian Dollar (AUD) attracts some buyers against the US Dollar (USD) after the Reserve Bank of Australia (RBA) interest rate decision.
The RBA board members decided to leave the Official Cash Rate (OCR) unchanged at 3.85% at its July policy meeting on Tuesday. The decision surprised the market expectations of a 25 basis points (bps) cut to 3.6%.
The RBA monetary policy statement said that the board will be attentive to the data and the evolving assessment of risks to guide its decisions, adding that the outlook remains uncertain. The attention will shift to the RBA press conference later on Tuesday. Hawkish remarks from the RBA Governor could boost the Aussie, while a dovish message tends to weaken it.
On the JPY’s front, US President Donald Trump late Monday announced imposing 25% levies on goods from Japan, effective August 1. Trump warned that any retaliatory tariff would be met with even higher tariffs but left the door open to relief from the measures for countries that ease trade barriers.
Japanese Prime Minister Shigeru Ishiba said early Tuesday that Japan hasn’t been able to reach an agreement with the US because the country kept defending what needs to be defended. Furthermore, weak wage growth data released from Japan earlier could further complicate the Bank of Japan’s (BoJ) path to normalizing monetary policy and turn out to be a key factor weighing on the JPY.
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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