- AUD/JPY receives support from the hawkish tone around the RBA’s policy outlook.
- The risk-sensitive AUD appreciates on improving market sentiment amid the dovish tone around the Fed’s interest rate path.
- The Japanese Yen struggles as next Prime Minister Shigeru Ishiba says monetary policy must remain accommodative.
AUD/JPY gains ground, trading around 98.70 during the European session on Monday. This rise in the AUD/JPY cross is attributed to the hawkish stance of the Reserve Bank of Australia (RBA), which supports the Australian Dollar (AUD). The RBA kept its cash rate at 4.35% for the seventh consecutive meeting and stated that policy would need to remain restrictive to ensure inflation eases.
AUD remains strong despite mixed manufacturing Purchasing Managers’ Index (PMI) data from China, Australia’s largest trading partner. China’s Caixin Manufacturing PMI fell to 49.3 in September, indicating contraction, from 50.4 in August. Meanwhile, China’s NBS Manufacturing PMI improved to 49.8, from 49.1 the previous month and beating the market consensus of 49.5.
Furthermore, rising expectations that the US Federal Reserve (Fed) may continue its policy easing in November are improving market sentiment and lending support to the risk-sensitive Australian Dollar. The CME’s FedWatch tool indicates that markets are assigning a 55.9% probability to a 25 basis point rate cut by the Federal Reserve in November.
The Japanese Yen (JPY) is receiving downward pressure due to dovish comments from Japan’s next Prime Minister, former Defense Chief Shigeru Ishiba. Ishiba stated on Sunday that the country’s monetary policy should remain accommodative, signaling the need to maintain low borrowing costs to support a fragile economic recovery, according to The Japan Times.
On Monday, Japan’s retail trade rose 2.8% year-on-year in August, beating market expectations of 2.3% and slightly beating the previous month’s upwardly revised 2.7% rise. On a monthly basis, seasonally adjusted retail trade rose 0.8%, marking the largest increase in three months, following a 0.2% increase in July.
Japan’s Chief Cabinet Secretary Yoshimasa Hayashi declined to comment on Monday’s daily stock market fluctuations. Hayashi emphasized the importance of closely monitoring the economic and financial situation both domestically and internationally with a sense of urgency. He also noted the need for continued collaboration with the Bank of Japan.
Interest rates FAQs
Financial institutions charge interest rates on loans from borrowers and pay them as interest to savers and depositors. They are influenced by basic interest rates, which are set by central banks based on the evolution of the economy. Typically, central banks are mandated to ensure price stability, which in most cases means targeting an underlying inflation rate of around 2%.
If inflation falls below the target, the central bank can cut base interest rates, in order to stimulate credit and boost the economy. If inflation rises substantially above 2%, the central bank typically raises core lending rates to try to reduce inflation.
In general, higher interest rates help strengthen a country’s currency by making it a more attractive place for global investors to park their money.
Higher interest rates influence the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or depositing cash in the bank.
If interest rates are high, the price of the US Dollar (USD) usually rises and, since Gold is priced in dollars, the price of Gold falls.
The federal funds rate is the overnight rate at which U.S. banks lend to each other. It is the official interest rate that the Federal Reserve usually sets at its FOMC meetings. It is set in a range, for example 4.75%-5.00%, although the upper limit (in this case 5.00%) is the figure quoted.
Market expectations about the Federal Reserve funds rate are tracked by the CME’s FedWatch tool, which determines the behavior of many financial markets in anticipation of future Federal Reserve monetary policy decisions.
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.
