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10 Dec 2024
AUD/JPY tumbles to near 96.50 as RBA leaves interest rate unchanged at 4.35%
- AUD/JPY trades in negative territory around 96.50 in Tuesday’s Asian session, losing 0.77% on the day.
- The RBA decided to keep the OCR on hold at 4.35% at its December meeting on Tuesday.
- Geopolitical risks might boost the safe-haven flows, benefiting the JPY.
The AUD/JPY cross weakens to near 96.55 during the Asian trading hours on Tuesday. The Australian Dollar (AUD) edges lower after the Reserve Bank of Australia (RBA) interest rate decision as the tone in the statement has turned slightly dovish.
The RBA kept the Official Cash Rate (OCR) on hold at 4.35% following the conclusion of its December policy meeting. The decision came in line with market expectations. The RBA made no changes to its policy settings for the ninth consecutive meeting. The Aussie attracts some sellers following the RBA interest rate decision.
According to the RBA Monetary Policy Statement, the board members are gaining some confidence that inflationary pressures are declining in line with these recent forecasts, but risks remain. The policymaker further stated that the outlook remains uncertain and broad and will continue to rely upon the data and the evolving assessment of risks to guide its decisions.
The uncertainty over the timing for the Bank of Japan (BoJ) to raise interest rates again weighs on the Japanese yen (JPY) against the shared currency. BoJ Governor Kazuo Ueda indicated a willingness to hike interest rates again if the BOJ grows more confident that inflation would remain around 2% due to rising wages and robust domestic demand. Traders have priced in nearly a 28% chance of a BOJ rate hike this month, down from around 66% at the end of last month.
Nonetheless, the rising geopolitical tensions in the Middle East, particularly after the downfall of Syrian President Bashar al-Assad, could boost the safe-haven currency like the JPY. On Monday, the rebel group that toppled Syria's President Bashar Al-Assad agreed to hand power to Mohammed Al Bashir to form a transitional administration. Investors will closely watch the development surrounding geopolitical risks in this region as the collapse of the Syrian leader regime could lead to a conflict involving regional countries.
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.