AUD/JPY steadies near 109.50 following China’s PMI, Japan’s CPI data

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AUD/JPY remains steady after registering losses in the previous trading day, hovering around 109.70 during the Asian hours on Tuesday. The currency cross could weaken as the Australian Dollar (AUD) holds losses following the release of China’s NBS Purchasing Managers’ Index (PMI) data.

AUD/JPY may weaken as the Australian Dollar holds losses after China’s NBS PMI data release.
China’s NBS Manufacturing PMI rose to 50.4, while the Non-Manufacturing PMI increased to 50.1 in March.
The Japanese Yen gains ground amid rising expectations of possible currency intervention.

China’s NBS Manufacturing PMI rose to 50.4 in March from 49.0 in February, beating expectations of 50.1 and returning to expansion, marking the strongest reading since March last year after two months of contraction. Meanwhile, the Non-Manufacturing PMI increased to 50.1 from 49.5, above forecasts of 49.9, signaling stabilization in the services sector following two months of contraction.

The Reserve Bank of Australia (RBA) released its March Meeting Minutes on Tuesday, indicating that board members agreed further tightening would likely be needed, but differed on the timing. Oil near $100 per barrel is seen capable of lifting June-quarter CPI to around 5%, with the majority concerned that inflation expectations could become unanchored without prompt action.

The AUD/JPY cross may struggle as the Japanese Yen (JPY) draws support from repeated verbal warnings by Tokyo authorities and growing expectations of possible intervention. On Monday, top currency official Atsushi Mimura said the government would act decisively if needed, echoing earlier comments from Finance Minister Satsuki Katayama.

Tokyo Consumer Price Index (CPI) rose 1.4% year-over-year (YoY) in March, easing from a revised 1.5% (revised from 1.6%) in February. Core CPI increased 1.7% YoY, slightly down from 1.8% and below expectations of 1.8%.

Both measures remain below the Bank of Japan’s (BoJ) 2% target. However, analysts see the slowdown as temporary, citing rising oil prices tied to Middle East tensions and higher import costs from the weak JPY, which are likely to push inflation higher in the coming months.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.