AUD/JPY hits fresh record highs above 110.00

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AUD/JPY extends its winning streak for the third successive session, trading around 110.00 during the European hours on Wednesday.

AUD/JPY gains as markets price an 80% chance of a May hike and 40 basis points of tightening this year.
China’s Services PMI rose to 52.3 in January, beating expectations and up from 52.0 in December
The Japanese Yen weakened ahead of the snap election, with Takaichi’s LDP expected to gain seats.

AUD/JPY extends its winning streak for the third successive session, trading around 110.00 during the European hours on Wednesday. The currency cross climbed to a record high of 110.18 during earlier hours, supported by the Australian Dollar (AUD) as the Reserve Bank of Australia’s (RBA) tightening cycle kicked off in February.

Markets have raised the probability of a May rate hike to 80% and now price in around 40 bps of additional tightening this year. The RBA lifted the Official Cash Rate (OCR) by 25 bps to 3.85% on Tuesday, citing stronger-than-expected growth and persistently high inflation.

China's Services Purchasing Managers' Index (PMI) rose to 52.3 in January from 52.0 in December. This figure came in stronger than the expectations of 51.8. China is a key trading partner of Australia, so any changes in the Chinese economy could impact the AUD.

The AUD/JPY cross also advanced as the Japanese Yen (JPY) weakened ahead of this weekend’s snap lower house election. Prime Minister Sanae Takaichi’s ruling LDP is expected to secure additional seats as she seeks voter support for higher spending, tax cuts, and a new security strategy. Her push for expansionary fiscal policies has fueled concerns over Japan’s fiscal outlook amid fears of debt-funded spending.

Takaichi characterized a weaker Yen as beneficial for export-oriented industries, signaling tolerance for a softer currency, before later clarifying that her remarks were intended to highlight economic resilience to exchange-rate fluctuations.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.