AUD/JPY pulls back from intra-day highs at 96.65, despite the favourable risk sentiment
- Aussie Dollar gains remain limited below 96.65 and maintains an immediate bearish trend in play.
- The Yen remains on the defensive, weighed by weaker demand for safe assets after the US-Japan deal.
- The dovish RBA minutes and weak Australian data are acting as headwinds for the AUD.
The Australian Dollar is one of the strongest performers in a risk-off session on Wednesday and is trading higher against the safe-haven Japanese Yen. The immediate AUD/JPY trend, however, remains bearish, in a sequence of lower highs since peaking at 97.45 last week, and with bulls capped below 96.60 so far today.
The Aussie rallied together with other risk-sensitive assets during Wednesday’s Asian and European trading sessions, following US President Trump’s announcement of a trade deal with Japan. This agreement has contributed to easing investors’ fears about the uncertain outlook for global trade and boosted hopes of more such deals ahead of the August 1 deadline.
The Yen picks up after PM Ishiba denies rumours of resignation
The Japanese Yen drew some support in the Early European session as Japan’s Prime Minister Ishiba stepped up to deny rumours spread by local media, suggesting that he might resign by the end of August. Ishiba´s comments have contributed to easing concerns about political uncertainty and have provided some support to the JPY.
In Australia, the minutes of the July 7-8 meeting revealed that some committee members voted for a 25 bps rate cut, which heightened market expectations that the bank might ease its monetary policy further after the August meeting, and increased negative pressure on the pair.
On Wednesday, the Australian Westpac Leading has failed to provide any significant support to the Aussie. The Index fell to 0.03% in June from the previous month's 0.1reading. These levels point to a weak economic growth that adds reasons for the RBA to continue cutting rates next month.
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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