Australian Dollar slips against Japanese Yen due to increased risk aversion
- AUD/JPY depreciates as escalating Middle East conflicts and tanker attacks have weighed heavily on global risk sentiment.
- Hawkish warnings from RBA officials keep expectations alive for another interest rate hike this month.
- Deutsche Bank highlighted that BoJ's Kazuyuki Masu struck a hawkish tone, stating the central bank will keep raising rates.
AUD/JPY extends its losing streak for the fourth consecutive day, trading around 110.70 during European hours on Thursday. The currency cross depreciates as the Australian Dollar (AUD) faces challenges amid escalating Middle East tensions that have weighed heavily on global risk sentiment.
However, recent developments show that Iran and the United States (US) struck tankers in the biggest wave of attacks on shipping since the war began, threatening to worsen the disruption of energy supplies from the Gulf. This pushed oil prices higher, intensifying inflationary pressures that have already started feeding into Australia’s consumer prices.
Consequently, expectations have grown regarding a fourth Reserve Bank of Australia (RBA) interest rate hike this year, a factor that could limit the AUD’s downside. Market participants are becoming increasingly confident in this trajectory, following warnings of upside inflation risks from Deputy Governor Andrew Hauser during an ABC interview on Tuesday.
Reinforcing this outlook, RBA Assistant Governor Sarah Hunter stated on Tuesday that the central bank may need to raise interest rates again if inflation proves more persistent than expected, keeping alive the prospect of another hike at its upcoming September meeting.
Global bond yields push toward multi-year highs
Deutsche Bank highlights that the recent back-up in global rates is not confined to Japan, noting that “Australia’s 10yr yield (+6.6bps) … is up to a post-2011 high of 5.27%, whilst Japan’s 10yr yield (+5.4bps) is up to 2.93%.” The bank points out that these moves underscore how both Australian and Japanese long-end yields are now trading near multi-year peaks as markets continue to reprice the path of policy normalisation.
BoJ’s Masu underlines steady path of policy normalisation
Deutsche Bank highlights that Bank of Japan board member Kazuyuki Masu struck a resolutely hawkish tone overnight, indicating that the central bank would “continue to raise the policy interest rate” as it advances its normalisation agenda. They note that Masu framed the policy objective in terms of price stability, stressing that “what is most vital from now on is to ensure that the underlying inflation rate does not significantly exceed 2%.”
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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