AUD/JPY breaks below 96.50 due to hawkish sentiment surrounding the BoJ

AUD/JPY edges lower as rising real wages bolster expectations of further BoJ rate hikes before the end of 2024.
BoJ’s Takata stated that "if the economy and prices move as expected, we will adjust the policy rate in several stages."
RBA Governor Michele Bullock stated that it is too early to consider rate cuts.

AUD/JPY retraces its recent gains from the previous session, trading around 96.30 during the Asian hours on Friday. The Japanese Yen (JPY) edges higher against the Australian Dollar (AUD) as rising real wages in July fuel speculation that the Bank of Japan (BoJ) may introduce another interest rate hike before the end of 2024.

Japan’s Labor Cash Earnings grew by 3.6% year-on-year, a deceleration from June's 4.5% increase but the highest since January 1997, surpassing market expectations of 3.1%.

The Japanese Yen also received support from the hawkish remarks from the Bank of Japan (BoJ) Board Member Hajime Takata on Thursday. Takata stated that "if the economy and prices move in line with our forecast, we will adjust the policy rate in several stages."

BoJ’s Takata also highlighted that the domestic economy is recovering moderately despite some signs of weakness. Although stock and FX markets have faced considerable volatility, Takata emphasized that the BoJ remains optimistic about achieving its inflation target.

The AUD/JPY cross appreciated as the Aussie Dollar received support from the positive Trade Balance data released on Thursday. Australia’s trade surplus widened to 6,009 million MoM in July, exceeding the expected 5,150 million and 5,589 million in the previous reading.

Additionally, the Reserve Bank of Australia (RBA) Governor Michele Bullock spoke at "The Anika Foundation" in Sydney on "The Costs of High Inflation," stating that it is too early to consider rate cuts. Currently, the board does not anticipate being able to reduce rates in the near term.

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.

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