The AUD/JPY pair builds on its steady rise for the second day in a row and rises to the 106.00 area, or a new high since July 2024, during the first part of the European session on Monday. Moreover, the fundamental backdrop favors bullish traders and indicates that the path of least resistance for spot prices remains to the upside.
The Japanese Yen (JPY) continues its relatively weak performance on the back of uncertainty over the potential timing of the next interest rate hike by the Bank of Japan (BoJ) and a deepening dispute between Japan and China. Indeed, China escalated its dispute with Japan last week and began restricting its exports of dual-use goods, including some rare earth elements, to Japan. The ban follows a diplomatic spat over Taiwan and increases supply chain risks for Japanese manufacturers, which is seen as undermining the Japanese yen and supporting the AUD/JPY pair.
In addition, the Yomiuri newspaper reported on Friday that Japanese Prime Minister Sanae Takaishi is considering holding early parliamentary elections in the first half of February. This adds a layer of uncertainty and supports the case for further downward movement in the near term for the Japanese Yen. On the other hand, the Australian Dollar (AUD) is deriving support from the prospects of near-term policy tightening by the Reserve Bank of Australia (RBA) and is turning out to be another factor that further contributes to the continued positive momentum of the AUD/JYP pair.
This in turn validates the positive near-term outlook for spot prices, although the cautious market mood warrants some caution before placing new bullish traders. The US incursion into Venezuela, US President Donald Trump’s threat to take military action in response to the unrest in Iran, the White House’s insistence on acquiring Greenland, and the war between Russia and Ukraine, all make investors nervous. This, in turn, could benefit the Japanese yen’s safe-haven status and act as a headwind for the risk-sensitive Australian dollar. This, in turn, could limit any further gains for the AUD/JPY.
RBA Frequently Asked Questions
The Reserve Bank of Australia (RBA) sets interest rates and manages Australia’s monetary policy. Decisions are made by the Board of Governors at 11 annual meetings and ad hoc emergency meetings as needed. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2% to 3%, but also “to contribute to currency stability, full employment, economic prosperity and the well-being of the Australian people.” The main tool for achieving this is raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation has always been thought to be a negative factor for currencies because it reduces the value of money overall, the opposite is the case in modern times with the relaxation of cross-border capital controls. Moderately high inflation now tends to prompt central banks to raise interest rates, which in turn attracts more capital flows from global investors looking for a profitable place to keep their money. This increases demand for the local currency, which in Australia’s case is the Australian dollar.
Macroeconomic data measures the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in safe and growing economies rather than unstable and shrinking economies. Greater capital inflows increase aggregate demand and the value of the local currency. Classic indicators, such as GDP, manufacturing PMIs, services, employment and consumer opinion surveys can influence the Australian dollar. A strong economy may encourage the Reserve Bank of Australia to raise interest rates, which will also support the Australian dollar.
Quantitative easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. Quantitative easing is the process by which the Reserve Bank of Australia (RBA) prints Australian dollars (AUD) for the purpose of purchasing assets – typically government or corporate bonds – from financial institutions, thus providing them with much-needed liquidity. Quantitative easing usually leads to a weaker Australian dollar.
Quantitative tightening (QT) is the opposite of quantitative easing. It is implemented after quantitative easing when the economic recovery is underway and inflation begins to rise. Whereas in QE, the Reserve Bank of Australia (RBA) buys government and corporate bonds from financial institutions to provide them with liquidity, in QT, the RBA stops purchasing any more assets, and stops reinvesting the capital owed on the bonds it already holds. It will be positive (or bullish) for the Australian dollar.
