Australian Dollar loses ground against Japanese Yen on Middle East uncertainty

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The AUD/JPY cross loses momentum to near 113.85 during the early European session on Tuesday. The Australian Dollar (AUD) weakens against the Japanese Yen (JPY) as Australia’s labor market surprised to the downside, and markets remain concerned over the Middle East uncertainty.

AUD/JPY weakens to around 113.85 in Tuesday’s early European session.
The surprise rise in Australia’s Unemployment Rate to 4.5% has cooled RBA rate hike bets in June.
Japan’s core CPI, excluding special factors, climbed 2.8% in April vs. 2.5% in March.

Traders reduce their bets of further interest rate hikes from the Reserve Bank of Australia (RBA) after a surprise rise in the domestic jobless rate. Unemployment Rate in Australia jumped to 4.5% in April, up from 4.3% in March. This figure registered the highest in about four and a half years.

The chance of a rate increase at the RBA's next meeting dropped to just 3%, from 13% before the release of the employment report, according to financial market pricing provided by Westpac.

Furthermore, investor optimism over an imminent US-Iran peace deal was tempered by new US strikes in the Middle ‌East, which weigh on the riskier assets such as the Aussie. The BBC reported on Tuesday that the US Central Command said that it launched new strikes on southern Iran, targeting Iranian missile sites and boats attempting to place mines.

The US military added that the strikes were taken in "self-defense" and were designed "to protect our troops from threats posed by Iranian forces.”

Japan's core consumer inflation rate excluding one-off factors, as measured by the Japanese central bank's new gauge, reached 2.8% in April, according to the Bank of Japan (BoJ) on Tuesday. This figure exceeded the BoJ’s 2% target and accelerated from 2.5% in March. The core-core Consumer Price Index (CPI), excluding special factors, increased 2.2% in April versus a 2.6% rise in March.

The new index, which strips out institutional factors such as education and energy-related subsidies, revealed a much faster year-on-year rise than the 1.4% rate in the benchmark core CPI figure the government released.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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.

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