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AUD/JPY rises to near 97.00 due to stronger commodity prices, risk-on sentiment

  • AUD/JPY appreciates as the AUD receives support from rising metals prices.
  • The PBoC maintained its one- and five-year Loan Prime Rates at 3.10% and 3.60%, respectively.
  • Japan’s Core Machinery Orders increased by 3.4% MoM in November, marking the strongest growth in nine months.

AUD/JPY continues to gain ground for the second successive day, trading around 97.00 during the early European hours on Monday. The Australian Dollar (AUD) receives support from stronger commodity prices and a broader risk-on sentiment.

However, the Aussie Dollar could face challenges as market expectations grow that the Reserve Bank of Australia (RBA) might start cutting rates as early as next month. Traders are now focusing on Australia’s quarterly inflation report, set to be released next week, for clues about the future direction of interest rates.

The People’s Bank of China (PBOC) announced on Monday that it would keep its Loan Prime Rates (LPRs) unchanged. The one-year Loan Prime Rate (LPR) remains at 3.10%, while the five-year LPR stands at 3.60%. Since China and Australia are close trading partners, any shifts in China’s economy could have an impact on Australian markets.

However, the upside of the AUD/JPY could be limited as the Japanese Yen (JPY) gains modest support from a rise in Japan's Core Machinery Orders, which increased for the second consecutive month, indicating a continued recovery in capital expenditure. According to government data released earlier this Monday, Core Machinery Orders grew by 3.4% month-on-month in November 2024, marking the strongest growth in nine months.

Additionally, growing speculation that the Bank of Japan (BoJ) will raise interest rates later this week bolstered the JPY. BoJ Governor Kazuo Ueda stated last week that there has been significant optimism regarding wage growth. He reiterated that the central bank would further raise the policy rate this year if economic and price conditions show continued improvement.

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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