- AUD/JPY loses traction near 97.90 in Wednesday’s Asian session.
- The upbeat Australian PMI data failed to boost the Aussie.
- The BoJ is expected to raise rates again by the end of the year.
The AUD/JPY cross trades in negative territory for the third consecutive day around 97.90 during the Asian trading hours on Thursday. The recent encouraging Australian Purchasing Managers Index (PMI) fails to boost the Aussie. Investors will closely monitor Bank of Japan's (BoJ) Governor Kazuo Ueda's speech on Friday for fresh impetus.
Data released by Judo Bank and S&P Global on Thursday showed that the preliminary reading of Australia's Judo Bank Manufacturing PMI climbed to 48.7 in August from 47.5 in July. The Services PMI rose to 52.2 in August versus 50.4 prior. Finally, the Composite PMI rose to 51.4 in August versus 49.9 prior.
The downside of the Australian Dollar (AUD) might be limited due to the hawkish stance of the Reserve Bank of Australia (RBA). The Australian central bank noted that the cash rate might stay unchanged for an extended period and that a rate cut is unlikely soon.
On the other hand, the expectation that the Bank of Japan (BoJ) will raise interest rates again by the end of the year lifts the Japanese Yen (JPY) against the AUD. According to a Reuters poll on Wednesday, the majority of the economists see the BoJ hikes again, with the median forecast for the end-of-year rate being 0.50%, marking a 25 basis points (bps) increase.
DBS Senior FX Strategist Philip Wee noted, “On August 23, Japan’s parliament will hold a special session regarding the Bank of Japan’s monetary policy decisions on July 31. BOJ Governor Kazuo Ueda should stand by the plan to raise rates again if the median forecasts set out on July 31 are met or exceeded.”
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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