- AUD/JPY loses gains as BoJ’s Ueda indicated no change in policy easing stance if the upcoming data align with forecasts.
- BoJ Governor Ueda stated that he is not considering selling long-term Japanese government bonds as a tool for adjusting rates.
- The Australian Dollar receives support from the improved risk aversion ahead of the Fed Powell’s speech.
AUD/JPY retraces its recent gains from the previous two days, trading around 97.80 during the early European hours on Friday. The Japanese Yen (JPY) strengthens following the speech by Bank of Japan (BoJ) Governor Kazuo Ueda in Parliament on Friday. Ueda stated that "the BoJ raised rates in July as the economy and inflation moved largely in line with forecasts."
BoJ Governor Ueda also indicated that there would be no change in the stance on adjusting monetary easing if the economy and inflation continue to align with forecasts. Ueda noted that recent BoJ policy decisions have been appropriate and warned that outlining the future policy path could lead to unnecessary speculation.
Ueda also stated that he is “not considering selling long-term Japanese government bonds (JGBs) as a tool for adjusting interest rates.” He noted that any reduction in JGB purchases would only account for about 7-8% of the balance sheet, which is a relatively small decrease. Ueda added that if the economy aligns with their projections, there could be a phase where they might adjust interest rates slightly further.
The downside of the AUD/JPY cross could be restrained as the Australian Dollar (AUD) receives support from improved risk-on sentiment ahead of the US Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole Symposium scheduled later on Friday. Powell may deliver a statement about the possibility of interest rate cuts in the United States (US), which is highly anticipated by market participants.
The Aussie Dollar could receive support from the hawkish mood surrounding the Reserve Bank of Australia (RBA) about its policy outlook. RBA Governor Michele Bullock expressed that the Australian central bank will not hesitate to raise rates again to combat inflation if needed. Additionally, RBA's August Meeting Minutes suggested that the cash rate might stay unchanged for an extended period.
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.
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