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Australian Dollar holds gains against Japanese Yen as China’s Trade Balance rises more than expected

  • AUD/JPY trades with mild gains around 112.90 in Tuesday’s Asian session. 
  • China's trade surplus surged to $105.43 billion in May. 
  • Japanese authorities issued verbal warnings, saying that the government is fully prepared to take decisive action to protect the domestic currency. 

The AUD/JPY cross posts modest gains near 112.90 during the Asian trading hours on Tuesday. A larger-than-expected China trade surplus provides some support to the China-proxy Australian Dollar (AUD). Markets are on high alert for foreign exchange intervention from Japanese authorities.

China's Trade Surplus surged to $105.43 billion in May, widening from $84.82 billion recorded in April, according to the General Administration of Customs on Tuesday. Exports rose by 19.4% YoY in May, compared to 14.1% in April, better than the 15.0% expected. Meanwhile, Imports climbed 27.4% YoY in May, versus 25.3% prior, above the market consensus of 25.0%. 

China's Exports gained momentum in May as earlier front-loading by overseas buyers to pre-empt Gulf War energy costs fed through to shipments, while robust demand for semiconductors and AI-related hardware provided an additional boost. The Aussie edges slightly higher following the upbeat China’s Trade Balance report. 

Nonetheless, the potential upside for the cross might be limited amid fears of currency intervention from Japanese authorities. Japan’s Finance Minister Satsuki Katayama on Tuesday emphasized that the stance is unchanged and authorities are prepared for decisive measures.

Australian Dollar FAQs

One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.

The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.

China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.

Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.

The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.

Author

Lallalit Srijandorn

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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