- The AUD/JPY cross could recover as traders anticipate that the RBA may avoid implementing rate cuts in 2024.
- Japan’s polls indicate the LDP-led coalition may lose its majority in the general election this weekend.
- Australia's Judo Bank Services PMI inched up to 50.6 in October, marking its ninth consecutive month of expansion.
AUD/JPY breaks its three-day winning streak, trading around 101.20 during the European hours on Thursday. The Japanese yen (JPY) gained some traction as buyers might have responded to verbal intervention from Japanese officials earlier in the day.
However, the upside of the Japanese Yen could be limited due to growing concerns over political instability, which further clouds the outlook for the Bank of Japan's (BoJ) monetary policy. In Japan, recent polls indicate the ruling coalition led by the Liberal Democratic Party (LDP) may lose its majority in the general election this weekend.
Japan's Finance Minister, Katsunobu Kato, voiced concern over the rapid and one-sided movements in the currency market, emphasizing the importance of stable currency movements that align with economic fundamentals, per Reuters.
Additionally, on Thursday, Japan's Deputy Chief Cabinet Secretary, Kazuhiko Aoki, stated that the government is closely monitoring foreign exchange fluctuations, including speculative activities, with a sense of urgency.
The downside of the AUD/JPY cross could be limited as the Australian Dollar (AUD) receives support from the prevailing hawkish sentiment surrounding the Reserve Bank of Australia (RBA), bolstered by the positive employment data. Earlier this week, RBA Deputy Governor Andrew Hauser noted that the labor participation rate is remarkably high and emphasized that while the RBA is data-dependent, it is not data-obsessed.
On the data front, Australia's Judo Bank Composite PMI slightly rose to 49.8 in October, up from 49.6 in September, signaling a second straight month of contraction in private sector output. The Services PMI inched up to 50.6 from 50.5, marking its ninth consecutive month of expansion, while the Manufacturing PMI dipped to 46.6 from 46.7, continuing its decline.
Inflation FAQs
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%.
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.
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.
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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