AUD/JPY holds positive ground as RBA leaves interest rate unchanged at 4.35%
- AUD/JPY trades in positive territory in Tuesday’s Asian session, up 0.22% on the day.
- The RBA decided to keep the OCR on hold at 4.35% at its November meeting on Tuesday.
- The US presidential election uncertainty might cap the upside for the cross.
The AUD/JPY cross gains traction to near 100.40 during the Asian trading hours on Tuesday. The Australian Dollar (AUD) edges higher after the Reserve Bank of Australia (RBA) interest rate decision.
The RBA kept the Official Cash Rate (OCR) on hold at 4.35% following the conclusion of its November policy meeting. The decision came in line with market expectations. The Aussie remains firm following the RBA rate decision.
According to the RBA Monetary Policy Statement, the board members will continue to rely upon the upcoming data and the evolving assessment of risks. The policymaker further stated that the monetary policy will need to be sufficiently restrictive until the central bank is confident that inflation is moving sustainably toward the target range.
Traders will take more cues from the RBA’s updated economic forecasts and Governor Michele Bullock’s press conference, which might offer some insight into the interest rate outlook.
On the other hand, the uncertainty surrounding the US presidential election could boost the safe-haven currency like the Japanese Yen (JPY) and cap the upside for the cross. Additionally, less dovish remarks from BoJ Governor Kazuo Ueda could underpin the JPY in the near term. "Many market players had bet that the next rate hike will come in the January-March quarter next year. But he sounded as if he left open the chance of a December hike," said Hiroshi Watanabe, senior economist at Sony Financial Group.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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