AUD/JPY slides below 104.00 mark, over one-month low amid modest JPY strength

AUD/JPY remains under some selling pressure for the third straight day on Tuesday.
A combination of factors continues to underpin the JPY and drag spot prices lower.
China’s economic woes dent demand for the Aussie and contribute to the downfall.

Haresh Menghani FXStreet

The AUD/JPY cross drifts lower for the third successive day on Tuesday – also marking its ninth day of a negative move in the previous ten – and drops to its lowest level since June 17 during the Asian session. Spot prices slide further below the 104.00 mark in the last hour, with bears looking to extend the recent corrective decline from the highest level since May 1991 touched earlier this month.

Against the backdrop of a suspected intervention by Japanese authorities, expectations the Bank of Japan (BoJ) could hike rates again at its upcoming policy meeting continue to underpin the Japanese Yen (JPY). Apart from this, the US political uncertainty benefits the JPY's relative safe-haven status and exerts some downward pressure on the AUD/JPY cross. Furthermore, worries about a slowdown in the Chinese economy – the world's second-largest economy – seem to weigh on the Australian Dollar (AUD) and contribute to driving flows away from the currency pair.

Bulls, meanwhile, failed to gain respite from unexpected interest rate cuts by the People's Bank of China (PBoC) on Monday. China's central bank lowered the one-year loan prime rate (LPR), the five-year LPR and the seven-day reverse repo rate by 10 basis points (bps) to 3.35%, 3.85% and 1.7%, respectively. This, along with expectations the US equity market could benefit from proposed Trump policies, remains supportive of the prevalent risk-on environment. This could cap any further JPY appreciation and lend some support to the risk-sensitive Aussie.

Furthermore, bets that the Reserve Bank of Australia (RBA) could raise interest rates again, bolstered by the upbeat labor market report for June and higher May inflation print, could act as a tailwind for the Aussie. This, in turn, warrants some caution before placing fresh bearish bets around the AUD/JPY cross. Investors now look to the release of flash global PMIs on Wednesday, which will drive demand for the safe-haven JPY. Apart from this, the broader risk sentiment should contribute to producing short-term trading opportunities around the currency pair.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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