AUD/JPY advances to near 99.50 due to hawkish RBA stance on policy outlook

AUD/JPY receives support from the hawkish sentiment surrounding the RBA’s interest rate trajectory.
The Australian Dollar may receive downward pressure from the rising geopolitical tensions in the Middle East.
Japan's Economy Minister Akazawa stated that PM Ishiba expects BoJ to conduct thorough economic assessments before further rate hikes.

AUD/JPY retraces its recent losses registered in the previous day, trading around 99.40 during Wednesday’s European session. The hawkish sentiment surrounding the Reserve Bank of Australia (RBA) regarding its interest rate trajectory provides support for the Australian Dollar (AUD) and underpins the AUD/JPY cross.

However, the upside of the risk-sensitive Aussie Dollar could be retrained due to rising risk aversion sentiment amid escalating geopolitical tensions in the Middle East. Iran launched over 200 ballistic missiles at Israel, prompting Prime Minister Benjamin Netanyahu to vow retaliation against Tehran for the Tuesday attack. In response, Iran warned that any counterstrike would lead to "vast destruction," heightening concerns of a broader conflict, per Bloomberg.

The Japanese Yen (JPY) received downward pressure as the BoJ’s Summary of Opinions from September’s Monetary Policy Meeting indicates no immediate plans for additional rate hikes. The central bank intends to maintain its accommodative stance but remains open to adjustments if economic conditions show significant improvement.

Additionally, Japan's Economic Revitalization Minister Ryosei Akazawa stated on Wednesday that Prime Minister Shigeru Ishiba anticipates the Bank of Japan will conduct thorough economic evaluations before raising interest rates again.

In his first news conference as the economy minister, Akazawa emphasized, "Our top priority is to ensure that Japan fully exits deflation," adding that "it will take some time to achieve a complete exit," according to Reuters.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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