- AUD/JPY loses traction near 97.90 in Wednesday’s Asian session.
- Upbeat Australian PMI data failed to boost the Aussie.
- The BoJ is expected to raise rates again later this year.
The AUD/JPY pair is trading in negative territory for the third consecutive day around 97.90 during Asian trading hours on Thursday. Australia’s recently encouraging Purchasing Managers’ Index (PMI) fails to boost the Aussie. Investors will closely watch Bank of Japan (BoJ) Governor Kazuo Ueda’s speech on Friday for fresh impetus.
Data released by Judo Bank and S&P Global on Thursday showed that the preliminary reading of Australia’s Judo Bank manufacturing PMI rose to 48.7 in August from 47.5 in July. The services PMI rose to 52.2 in August from 50.4 previously. Finally, the composite PMI rose to 51.4 in August from 49.9 previously.
The Australian Dollar (AUD)’s downside could be limited by the Reserve Bank of Australia’s (RBA) hawkish stance. The Australian central bank signaled that the cash rate could remain unchanged for an extended period and that a rate cut is unlikely soon.
On the other hand, the expectation that the Bank of Japan (BoJ) will raise interest rates again by the end of the year is boosting the Japanese Yen (JPY) against the AUD. According to a Reuters poll on Wednesday, most economists expect the BoJ to raise rates again, with the median forecast for the year-end rate at 0.50%, marking a 25 basis point (bps) increase.
DBS Senior FX Strategist Philip Wee noted, “On August 23, Japan’s parliament will hold a special session on the Bank of Japan’s July 31 monetary policy decisions. BoJ Governor Kazuo Ueda is expected to stick to the plan to raise rates again if the median forecasts set on July 31 are met or exceeded.”
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 data, 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 versus 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.
