Australian Dollar holds gains against Japanese Yen following PBoC rate decision

AUD/JPY holds steady as the Australian Dollar gains support from China’s central bank keeping its benchmark interest rates unchanged.
The People’s Bank of China kept its one-year and five-year Loan Prime Rates unchanged at 3.00% and 3.50%, respectively.
The Japanese Yen may find support on Japanese forex intervention risks and recent hawkish BoJ commentary.

AUD/JPY gains ground after posting minor losses in the previous day, trading around 113.30 during the Asian hours on Monday. The currency cross holds ground as the Australian Dollar (AUD) remains stronger following China’s latest monetary policy update.

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On Monday, the People’s Bank of China (PBOC) opted to keep its benchmark one-year and five-year Loan Prime Rates (LPRs) unchanged at 3.00% and 3.50%, respectively. Because China and Australia share a close trading relationship, the stability in the Chinese economy provided a supportive baseline for the proxy-vulnerable Australian Dollar.

Meanwhile, domestic policy continues to offer underlying support for the AUD. After holding the cash rate steady this month, Reserve Bank of Australia (RBA) Governor Michele Bullock emphasized that inflation remains too high, warning that further rate hikes cannot be entirely ruled out. Despite this hawkish rhetoric, market participants increasingly suspect that the RBA's tightening cycle has peaked, viewing another rate hike as unlikely unless second-quarter inflation figures significantly overshoot expectations.

However, the upside for the AUD/JPY pair may be capped if the Japanese Yen (JPY) finds support amid ongoing risks of forex intervention by Japanese authorities. This sentiment is reinforced by recent hawkish commentary from the Bank of Japan (BoJ).

Looking ahead, traders are shifting their focus to Tuesday's Japanese Purchasing Managers’ Index (PMI) data and Wednesday’s release of the BoJ’s Summary of Opinions from its June meeting, where policymakers notably lifted interest rates by 25 basis points to 1.00%, for further clues on Japan's economic trajectory.

Economic Indicator

PBoC Interest Rate Decision

The People’s Bank of China’s (PBoC) Monetary Policy Committee (MPC) holds scheduled meetings on a quarterly basis. However, China’s benchmark interest rate – the loan prime rate (LPR), a pricing reference for bank lending – is fixed every month. If the PBoC forecasts high inflation (hawkish) it raises interest rates, which is bullish for the Renminbi (CNY). Likewise, if the PBoC sees inflation in the Chinese economy falling (dovish) and cuts or keeps interest rates unchanged, it is bearish for CNY. Still, China’s currency doesn’t have a floating exchange rate determined by markets and its value against the US Dollar is fixed mainly by the PBoC on a daily basis.