AUD/JPY hovers near 98.50 following Australia’s monthly inflation data

AUD/JPY faced challenges as Australia’s trimmed mean fell to RBA’s target band of 2% to 3%.
Australia's monthly Consumer Price Index increased by 2.3% YoY in November, the highest level recorded since August.
Former BoJ Governor Haruhiko Kuroda forecasted additional interest rate hikes in the years ahead.

AUD/JPY recovers its small daily losses, trading around 98.40 during the Asian session on Wednesday. However, the Australian Dollar (AUD) faces challenges against its peers following the release of the monthly inflation data. Australia’s trimmed mean, a closely watched measure of core inflation, fell to an annual 3.2% from 3.5%, edging closer to the Reserve Bank of Australia's (RBA) target band of 2% to 3%.

However, Australia’s monthly Consumer Price Index (CPI) rose 2.3% year-over-year in November, surpassing the market forecast of 2.2% and marking an increase from the 2.1% rise seen in the previous two months. This is the highest reading since August. The figure remains within the RBA’s target range of 2–3% for the fourth consecutive month, aided by the ongoing impact of the Energy Bill Relief Fund rebate.

The Japanese Yen (JPY) strengthens on concerns about potential intervention by Japanese authorities in the open market. However, uncertainty surrounding the timing of the Bank of Japan's (BoJ) next rate hike may limit the JPY's gains.

Former Bank of Japan (BoJ) Governor Haruhiko Kuroda presented a research paper on Wednesday, forecasting additional interest rate hikes in the years ahead. Kuroda highlighted that Japan's economy is expected to grow at an annual rate of over 1%, driven by increasing real wages and robust consumer spending. The BoJ's cautious pace in raising rates aligns with a positive wage-inflation cycle, which helps maintain inflation at the 2% target.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

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