- A combination of factors dragged AUD/JPY to a multi-month low on Wednesday.
- Mixed macroeconomic data from Australia and disappointing PMIs from China weigh on the Australian Dollar.
- JPY gets a strong boost following the BoJ’s 15bp rate hike and hawkish outlook.
The AUD/JPY pair plunged to its lowest level since April 19 after the Bank of Japan (BoJ) announced its monetary policy decision on Wednesday, validating the downside break during the Asian session through the 200-day simple moving average (SMA). Spot prices, however, managed to bounce over 100 pips in the last hour, albeit without follow-through and remain below the psychological level of 100.00.
The Japanese Yen (JPY) is strengthening across the board following the BoJ’s surprise 15 basis point (bps) rate hike at the end of a two-day monetary policy meeting on Wednesday. The Australian Dollar (AUD), on the other hand, is undermined by mixed domestic data and contributed to the sharp intraday decline in the AUD/JPY pair. In fact, the Australian Bureau of Statistics (ABS) reported that the headline Consumer Price Index (CPI) rose by 1.0% in the second quarter of 2024 and the annual rate accelerated to 3.8%, both in line with consensus estimates.
That said, the Reserve Bank of Australia’s (RBA) trimmed average CPI came in at 0.8% and 3.9% on a quarterly and annual basis, respectively, missing market expectations. Nonetheless, the readings forced investors to reduce bets on further interest rate hikes by the RBA, which, coupled with unimpressive Chinese macroeconomic data, weighed heavily on the Australian Dollar (AUD). Other data released on Wednesday showed that Australian retail sales rose by 0.5% month-on-month in June compared to the 0.6% increase in May and the 0.2% expected.
Meanwhile, China’s official manufacturing PMI remained in contraction territory for the third consecutive month and edged down slightly from 49.5 to 49.4 in July. Also, the National Bureau of Statistics (NBS) non-manufacturing PMI declined to 50.2 from 50.5 in June, as expected. The data does little to ease concerns about a slowdown in the world’s second-largest economy or provide any boost to the Australian Dollar, China’s proxy. That said, the emergence of some selling around the Japanese Yen (JPY) helps limit any further downside for the AUD/JPY cross.
However, the BoJ’s hawkish outlook favors JPY bulls and suggests that the path of least resistance for spot prices remains to the downside. In its monetary policy statement, the Japanese central bank noted that underlying inflation is expected to pick up gradually and that the economy is recovering moderately. The BoJ added that if the outlook for economic activity and prices is realized, it will continue to raise policy rates and adjust the degree of monetary accommodation accordingly. This calls for caution before confirming a bottom for the AUD/JPY cross.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets the country’s monetary policy. Its mandate is to issue banknotes and carry out monetary and foreign exchange control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has been pursuing ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflation environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing money to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further relaxed policy by first introducing negative interest rates and then directly controlling the yield on its 10-year government bonds.
The Bank of Japan’s massive stimulus has caused the Yen to depreciate against its major currency peers. This process has been exacerbated more recently by a growing policy divergence between the Bank of Japan and other major central banks, which have opted to sharply raise interest rates to combat decades-high inflation. The Bank of Japan’s policy of keeping rates low has led to a widening spread with other currencies, dragging down the value of the Yen.
The weak yen and the surge in global energy prices have caused Japanese inflation to rise, exceeding the Bank of Japan’s 2% target. However, the Bank of Japan judges that a sustainable and stable achievement of the 2% target is still not in sight, so a sharp change in current monetary policy seems unlikely.
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.
