AUD/JPY hangs near weekly low below 109.00 amid stronger JPY; downside seems limited

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The AUD/JPY cross meets with a fresh supply near the 109.40 area during the Asian session on Thursday and slides back closer to the weekly trough, touched the previous day. Spot prices currently trade around the 108.70 region, down 0.40% for the day, though the downside potential seems limited.

AUD/JPY attracts some sellers on Thursday and is pressured by notable JPY strength.
Prospects for more BoJ interest rate hikes and easing fiscal concerns underpin the JPY.
The RBA’s hawkish outlook continues to support the AUD and limits losses for the cross.

The Japanese Yen (JPY) continues with its relative outperformance that followed Prime Minister Sanae Takaichi's victory in the lower house election on Sunday, which paved the way for more stimulus. Meanwhile, investors remain hopeful that Takaichi could be more fiscally responsible and her policies will boost the economy, prompting the Bank of Japan (BoJ) to stick to its rate-hike path. This, in turn, continues to boost the JPY and is seen as a key factor exerting pressure on the AUD/JPY cross.

The Australian Dollar (AUD), on the other hand, remains supported by the Reserve Bank of Australia's (RBA) hawkish outlook. In fact, RBA Governor Michele Bullock said earlier today that the central bank will raise interest rates again if inflation becomes entrenched. Adding to this, RBA Assistant Governor Sarah Hunter said that inflation is expected to remain above the 2% to 3% annual target for some time and that the labour market has stabilised from its earlier slowdown but remains tight.

Traders are currently pricing in a greater chance that the RBA will hike interest rates again at its May policy meeting. Apart from this, China's inflation figures released this Wednesday reinforced concerns that deflationary pressures continue to weigh on the world’s second-largest economy and raised hopes for more stimulus. This, along with the underlying bullish sentiment, is seen as underpinning the risk-sensitive and holding back traders from placing aggressive bearish bets around the AUD/JPY cross.

RBA FAQs

What is the Reserve Bank of Australia and how does it influence the Australian Dollar?

The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by 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.

How does inflation data impact the value of the Australian Dollar?

While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.

How does economic data influence the value of the Australian Dollar?

Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.

What is Quantitative Easing (QE) and how does it affect 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. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.

What is Quantitative tightening (QT) and how does it affect the Australian Dollar?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.