AUD/JPY sits near weekly top, bulls await sustained move beyond 96.00 mark

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The AUD/JPY cross reverses an Asian session dip to the 95.65 area and climbs back closer to the weekly high touched earlier this Friday. Spot prices, however, lack follow-through, with bulls awaiting a sustained strength and acceptance above the 95.00 mark before positioning for any further gains.

AUD/JPY enters a bullish consolidation phase near the weekly high touched this Friday.
A combination of factors undermines the safe-haven JPY and lends support to the cross.
The divergent RBA-BoJ policy expectations keep a lid on any further gains for spot prices.

The Japanese Yen (JPY) attracts some sellers after the Summary of Opinions from the Bank of Japan's (BoJ) July meeting showed that policymakers remain worried about the negative impact of higher US tariffs on the domestic economy. Apart from this, the upbeat market contributes to the safe-haven JPY's relative underperformance against the risk-sensitive Australian Dollar (AUD) and acts as a tailwind for the AUD/JPY cross.

The Aussie bulls, however, seem reluctant to place aggressive bets and opt to move to the sidelines ahead of the key central bank event next week. The Reserve Bank of Australia (RBA) is scheduled to announce its policy decision next Tuesday and is widely expected to lower borrowing costs. This marks a significant divergence in comparison to hawkish BoJ expectations and might cap meaningful gains for the AUD/JPY cross.

In fact, the BoJ revised its inflation forecast at the end of the July meeting last week, and reiterated that it will raise interest rates further if growth and inflation continue to advance in line with its estimates. This keeps the door open for an imminent rate hike by the end of this year, which should help limit deeper JPY losses and warrants some caution before positioning for any further near-term appreciating move 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.