- AUD/JPY continues scaling higher for the third straight day and climbs to a fresh multi-decade high.
- The risk-on mood undermines the safe-haven JPY and lends support amid hawkish RBA expectations.
- Speculations that the BoJ may act soon in response to the weakening JPY and cap any further gains.
The AUD/JPY cross gains positive traction for the third successive day and climbs to its highest level since May 1991, around the 109.35 area during the Asian session on Thursday. The momentum is sponsored by a combination of factors, though speculations that the Bank of Japan (BoJ) may raise interest rates in response to a weakening Japanese Yen (JPY) might cap any further gains.
Moreover, a Bloomberg report on Tuesday said that the BoJ is conducting three in-person meetings with banks, securities firms, and financial institutions to assess a feasible pace for scaling back its purchases of Japanese Government Bonds. Meanwhile, Reuters reported on Wednesday – citing unnamed sources – that the BoJ will likely trim this year's economic growth forecast and project inflation will stay around its 2% target in coming years at its meeting later this month. Adding to this, the prevalent risk-on environment, which tends to undermine the safe-haven JPY and benefit risk-sensitive Aussie, is seen acting as a tailwind for the AUD/JPY cross.
The strong move up could further be attributed to bets that the Reserve Bank of Australia (RBA) could possibly be raising interest rates again. That said, speculations that Japanese authorities will eventually intervene to prop up the domestic currency might hold back traders from placing fresh bullish bets around the AUD/JPY cross. Market participants, however, now see the 165.00 mark for the USD/JPY pair as a new line in the sand for intervention. This, in turn, might do little to inspire the JPY bulls, which, along with this week's breakout through the 108.60 horizontal resistance, suggests that the path of least resistance for the AUD/JPY cross is to the upside.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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