AUD/JPY hovers around 98.00 as traders await Meeting Minutes from both central banks
- AUD/JPY maintains its position ahead of Meeting Minutes from the RBA and BoJ due on Tuesday.
- The Australian Dollar could receive downward pressure as the RBA may begin rate cuts in February.
- Stronger Japan’s inflation data has increased the likelihood of a potential rate hike by the BoJ in January or March.
AUD/JPY retraces its recent losses from the previous session, trading around 98.00 during the early European hours on Monday. However, the upside of the AUD/JPY cross could be restrained as the Australian Dollar (AUD) could face challenges amid the increased likelihood of the Reserve Bank of Australia (RBA) beginning cutting its cash rate as early as February, due to mounting signs of an economic slowdown.
Moreover, the National Australia Bank (NAB) maintained its forecast for the first RBA rate cut at the May 2025 meeting, though they acknowledged February as a possibility. NAB's report indicates that the Q4 trimmed mean inflation is projected at 0.6% quarter-on-quarter, with a gradual easing expected, reaching 2.7% by late 2025.
Strong National Consumer Price Index (CPI) data from Japan released on Friday left the door open for a potential interest rate hike by the Bank of Japan (BoJ) in January or March. Inflation reached a three-month high of 2.9% year-over-year in November, up from 2.3% in October. Additionally, the annual core inflation rate rose to 2.7%, exceeding market expectations of 2.6%.
However, traders remain skeptical about the BoJ's intentions to hike rates further following the central bank’s decision to keep its policy rate for the third consecutive meeting, keeping the short-term rate target within the range of 0.15%-0.25%, in line with market expectations.
Traders are eagerly anticipating the release of the Meeting Minutes from both the Reserve Bank of Australia (RBA) and the Bank of Japan (BOJ), scheduled for Tuesday.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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