- AUD/JPY extends its decline near 94.25 in the European session on Monday morning, down 0.18% on the day.
- Economists expect the BoJ to raise interest rates further by the end of this year.
- Concerns about China’s economic slowdown continue to weigh on the AUD, China’s proxy.
The AUD/JPY pair extends its decline around 94.25 on Monday during the morning European session. The stronger Japanese Yen (JPY) and hawkish expectations ahead of the Bank of Japan (BoJ) key interest rate decision on Friday drag the pair lower.
The BoJ is unlikely to raise interest rates at its September policy meeting on Friday, but most economists in a Reuters poll still expect a hike by year-end. This, in turn, supports the JPY and weighs on the AUD/JPY cross. Junki Iwahashi, senior economist at Sumitomo Mitsui Trust Bank, noted that the Japanese central bank is expected to proceed cautiously with rate hikes at a pace of about once every six months as it assesses the impact of monetary tightening on the domestic economy.
On the Australian Dollar front, renewed signs of deflation and a sluggish economy in China continue to undermine the Australian Dollar (AUD), a proxy for China. It is worth noting that China is Australia’s largest trading partner, and negative developments around the Chinese economy generally weigh on the AUD.
Australian employment data is due for release on Thursday. The country’s unemployment rate is projected to remain stable at 4.2% in August, while the employment change is estimated to show an increase of 30,800 in the same month from 58,200 in July. If Australian labour market data shows stronger momentum, this could lift the Australian dollar and limit the cross’s downside.
Australian Dollar FAQs
One of the most important factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Since Australia is a resource-rich country, another key factor is the price of its largest export, iron ore. The health of the Chinese economy, its largest trading partner, is a factor, as is inflation in Australia, its growth rate and the Trade Balance. Market sentiment, i.e. whether investors are betting on riskier assets (risk-on) or seeking safe havens (risk-off), is also a factor, with risk-on being positive for the 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 RBA’s main objective 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 ones. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former being negative for the AUD and the latter positive for the AUD.
China is Australia’s largest trading partner, so the health of the Chinese economy greatly influences the value of the Australian Dollar (AUD). When the Chinese economy is doing well, it buys more raw materials, goods and services from Australia, which increases demand for the AUD and drives up its value. The opposite occurs when the Chinese economy is not growing as fast as expected. Therefore, positive or negative surprises in Chinese growth data often have a direct impact on the Australian Dollar.
Iron ore is Australia’s largest export, worth $118 billion per year as of 2021, with China being its main destination. The price of iron ore can therefore be a driver of the Australian dollar. Typically, if the price of iron ore rises, the AUD rises as well, as aggregate demand for the currency increases. The opposite occurs when the price of iron ore falls. Higher iron ore prices also tend to lead to a higher probability of a positive trade balance for Australia, which is also positive for the AUD.
The trade balance, which is the difference between what a country earns from its exports and 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, its currency will gain value solely because of the excess demand created by foreign buyers wanting to purchase its exports compared to what it spends on buying imports. Therefore, a positive net trade balance strengthens the AUD, with the opposite effect if the trade balance is negative.
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.
