AUD/JPY advances to fresh high since July 2024; eyes 106.00 amid a weaker JPY

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AUD/JPY attracts buyers for the second straight day amid a combination of supporting factors.
Reports that Japan's Takaichi may call an early election and the BoJ uncertainty undermine the JPY.
The hawkish RBA also acts as a tailwind for spot prices, though a weaker risk tone might cap gains.

The AUD/JPY cross builds on its steady ascent for the second straight day and climbs to the 106.00 neighborhood, or a fresh high since July 2024, during the early part of the European session on Monday. Moreover, the fundamental backdrop favors bullish traders and suggests that the path of least resistance for spot prices remains to the upside.

The Japanese Yen (JPY) continues with its relative underperformance on the back of the uncertainty over the likely timing of the next interest rate hike by the Bank of Japan (BoJ) and a deepening Japan-China rift. In fact, China escalated its dispute with Japan last week and has begun restricting exports of dual-use goods, including some rare earth elements, to Japan. The ban follows a diplomatic row over Taiwan and heightens supply-chain risk for Japanese manufacturers, which is seen undermining the JPY and supporting the AUD/JPY cross.

Adding to this, the Yomiuri newspaper reported on Friday that Japan's Prime Minister Sanae Takaichi was considering holding a snap parliamentary election in the first half of February. This adds to layer of uncertainty and backs the case for a further near-term depreciating move for the JPY. The Australian Dollar (AUD), on the other hand, draws support from prospects of a near-term policy tightening by the Reserve Bank of Australia (RBA) and turns out to be another factor further contributing to the AUD/JYP pair's ongoing positive momentum.

This, in turn, validates the near-term positive outlook for spot prices, though the cautious market mood warrants some caution before placing fresh bullish traders. The US incursion in Venezuela, US President Donald Trump's threat of military action in response to the unrest in Iran, the White House’s insistence on acquiring Greenland, and the Russia-Ukraine war keep investors on edge. This, in turn, could benefit the JPY's safe-haven status and act as a headwind for the risk-sensitive Aussie. This, in turn, could cap any further gains for 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.