- AUD/JPY depreciates due to the hawkish mood surrounding the BoJ interest rates outlook.
- Rabobank economists highlighted that JPY net long positions were at their highest level since October 2016.
- The Australian Dollar struggles due to rising concerns over China's economic outlook.
AUD/JPY holds losses, trading around 94.90 during the Asian hours on Tuesday. The downside of the AUD/JPY cross is driven by the hawkish sentiment surrounding the Bank of Japan (BoJ) interest rates outlook.
Rabobank economists Jane Foley and Molly Schwartz highlighted on Monday that JPY net long positions were at their highest level since October 2016. While there is minimal expectation for a rate hike by the Bank of Japan at its policy meeting on Friday, traders will be closely watching for any hints that October could potentially be a more active meeting.
Reuters reported on Tuesday that Japanese Finance Minister Shunichi Suzuki stated that rapid foreign exchange (FX) fluctuations are undesirable. Suzuki emphasized that officials will closely monitor how FX movements affect the Japanese economy and people's livelihoods. The government will continue to assess the impact of a stronger Japanese Yen and respond accordingly.
The Australian Dollar (AUD) receives downward pressure from rising fears over China's economic outlook. Analysts noted that the latest weak economic data indicates serious challenges for the world's second-largest economy. Since China is a key trading partner for Australia, fluctuations in China's economic health can have a significant effect on the Australian market.
Economists at Goldman Sachs and Citi have reduced their 2024 GDP growth forecasts for China to 4.7%, falling short of Beijing's target of around 5.0%. SocGen describes the situation as a "downward spiral," while Barclays calls it "from bad to worse" and a "vicious cycle." Morgan Stanley also cautions that "things could get worse before they get better," according to a Reuters report.
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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