- AUD/JPY strengthens as rising commodity prices, including gold, steel, and iron ore, support the Australian Dollar.
- The AUD faced challenges after Trump decided to uphold a 25% tariff on Australian aluminum and steel exports.
- The BoJ is expected to leave interest rates unchanged next week while evaluating the risks of escalating US trade tensions.
AUD/JPY recoups recent losses from the prior session, trading around 93.30 during Asian hours on Friday. The Australian Dollar (AUD) finds support from rising commodity prices, including Gold, Steel, and Iron Ore, bolstering its strength against the Japanese Yen (JPY).
However, global trade tensions weigh on the AUD/JPY cross following US President Donald Trump’s decision to maintain a 25% tariff on Australian aluminum and steel exports, valued at nearly $1 billion. This move adds pressure to Australia’s trade outlook and key exports. Despite this, Australian Prime Minister Anthony Albanese confirmed that Australia will not impose retaliatory tariffs on the US, stating that such measures would increase costs for consumers and drive inflation higher.
Meanwhile, the Japanese Yen remains under pressure amid a cautious stance from the Bank of Japan (BoJ). The central bank is expected to keep interest rates unchanged next week while assessing the risks posed by escalating US trade tensions on Japan’s export-driven economy. The timing of the BoJ’s next rate hike remains uncertain, with policymakers monitoring global uncertainties.
“Japan’s economy and price developments appear stable, but external risks are growing,” a source familiar with BoJ discussions told Reuters. “Heightened global uncertainty could impact the BoJ’s rate hike plans,” echoed two additional sources.
Despite the recent pullback, the JPY remains near its strongest levels against its peers in months, supported by expectations of further BoJ rate hikes this year. Additionally, Japanese firms have agreed to substantial wage increases for the third consecutive year to help workers cope with inflation and address labor shortages. Higher wages are expected to boost consumer spending, fuel inflation, and provide the BoJ with greater flexibility for future rate hikes.
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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