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AUD/JPY depreciates to near 100.50, downside appears limited due to hawkish RBA

  • AUD/JPY loses ground despite a hawkish sentiment surrounding the RBA regarding its policy outlook.
  • The Australian Dollar may limit its downside as an RBA rate cut is unlikely in the near term.
  • The Japanese Yen may depreciate as the loss of the LDP coalition has increased uncertainty regarding the BoJ rate-hike plans.

AUD/JPY retraces its recent gains from the previous session, trading around 100.50 during the early European hours on Tuesday. The downside of the AUD/JPY cross could be limited due to the Reserve Bank of Australia's (RBA) hawkish stance on its policy outlook.

The Reserve Bank of Australia has indicated that the current cash rate of 4.35% is restrictive enough to steer inflation back within the target range of 2%-3% while still supporting employment. Consequently, a rate cut is unlikely in the near term, especially as early as next month.

Traders are now focused on Australia’s third-quarter Consumer Price Index (CPI) data, due for release on Wednesday, as they seek further insights into the RBA’s potential monetary policy direction.

On the JPY’s front, Japan’s Liberal Democratic Party (LDP)-coalition lost its parliamentary majority in Sunday's election, which has increased uncertainty regarding the Bank of Japan's (BoJ) rate-hike plans, which puts downward pressure on the Japanese Yen (JPY).

The Bank of Japan’s interest rate decision is set to be the focal point on Thursday, with nearly 86% of economists surveyed by Reuters expecting the central bank to maintain its current rates at the October meeting.

On Tuesday, Japan’s Finance Minister Katsunobu Kato stated that he is “closely watching FX movements, including those driven by speculators, with heightened vigilance,” but refrained from commenting on specific forex levels. Kato emphasized the importance of stable currency movements that reflect economic fundamentals.

Interest rates FAQs

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.

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.

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.

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.

Author

Akhtar Faruqui

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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