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AUD/JPY inches lower to near 100.00, downside risk seems limited due to hawkish RBA

  • AUD/JPY remains tepid due to a potential for forex intervention by the Japanese authorities.
  • The Japanese Yen faced challenges due to uncertainty surrounding the BoJ policy outlook.
  • The Australian Dollar may appreciate as a solid labor report has reduced the odds of RBA’s rate cuts this year.

The AUD/JPY pair continues to edge lower for the second consecutive session, trading near 100.20 during European trading hours on Monday. The Japanese Yen (JPY) may have gained some support from the possibility of currency intervention by Japanese authorities.

However, uncertainty surrounding the timing and pace of future rate hikes by the Bank of Japan (BoJ) remains a key factor weighing on the Yen, which could help limit the downside of the AUD/JPY cross.

On Friday, Japan’s Vice Finance Minister for International Affairs, Atsushi Mimura, remarked that recent Yen movements have been "somewhat rapid and one-sided," emphasizing that excessive volatility in the forex market is undesirable.

The downside risk for the AUD/JPY cross appears limited, as the Australian Dollar (AUD) may be buoyed by the hawkish sentiment surrounding the Reserve Bank of Australia (RBA). Last week's strong employment data from Australia has diminished the chances of the RBA cutting interest rates this year.

Additionally, the Aussie Dollar has been supported by China’s recent rate cuts, as China is Australia's largest trading partner. On Monday, the People's Bank of China (PBoC) lowered the 1-year Loan Prime Rate (LPR) from 3.35% to 3.10% and the 5-year LPR from 3.85% to 3.60%, as expected. These reductions in borrowing costs are likely to boost China's domestic economic activity, which could, in turn, drive demand for Australian exports.

RBA Deputy Governor Andrew Hauser addressed the CBA 2024 Global Markets Conference in Sydney on Monday, expressing slight surprise at the strength of employment growth. Hauser noted that the labor participation rate is remarkably high and emphasized that while the RBA is data-dependent, it is not data-obsessed.

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.

Author

Akhtar Faruqui

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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