AUD/JPY falls toward 93.00 due to hawkish sentiment surrounding the BoJ’s policy outlook
- AUD/JPY declines as the Japanese Yen stays strong amid expectations of further interest rate hikes by the BoJ.
- Japan’s Atsushi Mimura noted that both large corporations and small to medium-sized businesses anticipate significant wage increases.
- The Australian Dollar found support following the release of Australia’s TD-MI Inflation Gauge and stronger-than-expected China Manufacturing PMI data.
AUD/JPY depreciates to near 93.00 during European hours on Monday. The currency cross weakens as the Japanese Yen (JPY) remains firm amid expectations that the Bank of Japan (BoJ) will continue raising interest rates. This sentiment is reinforced by a rise in Japan’s 10-year government bond yield, which increased by 3 basis points to 1.4%.
Japan’s Vice Finance Minister for International Affairs, Atsushi Mimura, stated on Monday that not only large firms but also small and medium-sized businesses anticipate strong wage hikes. Despite this, real private consumption in Japan remains below pre-Covid levels, though corporate investment and inbound tourism continue to show strength.
Last week, BoJ Governor Kazuo Ueda cautioned that uncertainty surrounding US President Donald Trump’s potential tariff policies could impact the global economic outlook, requiring careful monetary policy adjustments.
Meanwhile, the Australian Dollar (AUD) found support from positive Chinese economic data. China’s Caixin Manufacturing Purchasing Managers’ Index (PMI) rose to 50.8 in February from 50.1 in January, surpassing market expectations of 50.3. Given China's importance as a key trading partner, this boost in manufacturing activity supported the AUD.
In Australia, TD-MI Inflation Gauge declined by 0.2% month-over-month in February, reversing a 0.1% increase in January. This marked the first drop since last August and followed the Reserve Bank of Australia's (RBA) decision to cut its cash rate by 25 basis points to 4.1% in its first monetary policy meeting of the year, signaling continued easing in inflation. However, on an annual basis, inflation rose by 2.2%, slightly lower than the previous 2.3% increase.
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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