- AUD/JPY receives support from hawkish sentiment around the RBA’s interest rate path.
- The Australian Dollar could come under downward pressure from rising geopolitical tensions in the Middle East.
- Japan’s Economy Minister Akazawa stated that Prime Minister Ishiba expects the BoJ to conduct thorough economic assessments before further rate hikes.
AUD/JPY recovers its recent losses recorded the previous day, trading around 99.40 during the European session on Wednesday. The hawkish sentiment around the Reserve Bank of Australia (RBA) on its interest rate path provides support to the Australian Dollar (AUD) and supports the AUD/JPY cross.
However, the risk-sensitive Australian dollar’s upside could be limited due to rising risk-off sentiment amid escalating geopolitical tensions in the Middle East. Iran launched more than 200 ballistic missiles at Israel, prompting Prime Minister Benjamin Netanyahu to vow retaliation against Tehran for Tuesday’s attack. In response, Iran warned that any counterattack would lead to “massive destruction,” raising concerns of a broader conflict, according to Bloomberg.
The Japanese Yen (JPY) received downward pressure as the BoJ’s Summary of Views from the September Monetary Policy Meeting indicates that there are no immediate plans for further rate hikes. The central bank intends to maintain its accommodative stance but remains open to adjustments if economic conditions show significant improvement.
Additionally, Japan’s Economic Revitalization Minister Ryosei Akazawa stated Wednesday that Prime Minister Shigeru Ishiba anticipates the Bank of Japan will conduct thorough economic assessments before raising interest rates again.
In his first news conference as economy minister, Akazawa emphasized, “Our top priority is to ensure that Japan completely emerges from deflation,” adding that “it will take some time to achieve a complete exit,” according to Reuters.
Central banks FAQs
Central banks have a key mandate to ensure price stability in a country or region. Economies constantly face inflation or deflation when the prices of certain goods and services fluctuate. A constant rise in the prices of the same goods means inflation, a constant fall in the prices of the same goods means deflation. It is the central bank’s job to keep demand in line by adjusting its interest rate. For the largest central banks, such as 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 an important tool to raise or lower inflation: modify its reference interest rate. At pre-communicated times, the central bank will issue a statement with its reference interest rate and give additional reasons why it maintains or modifies it (cuts or raises it). Local banks will adjust their savings and loan rates accordingly, which in turn will make it harder or easier for citizens to make a profit on their savings or for companies to borrow and invest in their businesses. When the central bank substantially raises interest rates, we speak of monetary tightening. When you reduce your reference rate, it is called monetary easing.
A central bank is usually politically independent. Members of the central bank’s policy council go through a series of panels and hearings before being appointed to a position on the policy council. Each member of that council usually has a certain conviction about how the central bank should control inflation and the subsequent monetary policy. Members who want a very loose monetary policy, with low rates and cheap loans, to substantially boost the economy, while settling for inflation slightly above 2%, are called “doves.” Members who prefer higher rates to reward savings and want to control inflation at all times are called “hawks” and will not rest until inflation is at 2% or just below.
Typically, there is a chair who leads each meeting, has to create a consensus among the hawks or doves, and has the final say when votes need to be divided to avoid a 50-50 tie on whether to adjust current policy. The president will give speeches, which can often be followed live, communicating the current monetary stance and outlook. A central bank will try to push its monetary policy without causing violent swings in rates, stocks or its currency. All central bank members will channel their stance toward markets ahead of a monetary policy meeting. A few days before a monetary policy meeting is held and until the new policy has been communicated, members are prohibited from speaking publicly. This is what is called the silent period.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
