- The Aud/JPY recovers some positive traction after the modest fall of the previous day.
- A weaker USD benefits the AU, while the reduction in the expectations of troop cuts from the BOJ weighs on the JPY.
- The divergent policy expectations of the BOJ and the RBA justify a certain caution for the bulls.
The Aud/JPY crossing is based on the night rebound from the 93.80 area and winning some positive traction during the Asian session on Friday. However, cash prices remain confined within a range of several days amid mixed fundamental signals and currently quote around the horizontal resistance of 94.35-94.40, with an increase of less than 0.10% in the day.
The Australian dollar (AUD) benefits from a weaker US dollar (USD) and obtains additional support after the Popular Bank of China (PBOC) decided to keep its preferential loan rates (LPR) without changes. The Japanese Yen (JPY), on the other hand, struggles to attract significant buyers despite the hard line expectations of the Bank of Japan (BOJ) and serves as a favorable wind for the Aud/JPY crossing.
The most early published data showed that the National Annual Consumer Price Index (CPI) of Japan remained well above the 2% objective of the BOJ in May. This reaffirms the market bets that the Central Bank will raise interest rates. Apart from this, the persistent uncertainties related to trade, together with the increase in geopolitical tensions in the Middle East, provide some support for JPY as a safe refuge.
In contrast, the disappointing details of Thursday’s Australian employment pointed to signs of weakness in the labor market and supported the possibility of an upcoming cut of interest rates on the part of the Bank of the Australian Reserve (RBA) in July. This could stop the operators to perform aggressive bullish bets around the AU and maintain a limit on any additional movement for the Aud/JPY crossing.
FAQS Central Banks
Central banks have a key mandate that consists in guaranteeing the stability of prices 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 decrease in the prices of the same goods means deflation. It is the Central Bank’s task to keep the demand online by adjusting its interest rate. For larger central banks, such as the US Federal Reserve (FED), the European Central Bank (ECB) or the Bank of England (BOE), the mandate is to maintain inflation about 2%.
A central bank has an important tool to raise or lower inflation: modify its reference interest rate. In precommunicated moments, the Central Bank will issue a statement with its reference interest rate and give additional reasons of why it maintains or modifies it (cut it or the SUBE). Local banks will adjust their savings and loan rates accordingly, which in turn will make it difficult or facilitate that citizens obtain profits from their savings or that companies ask for loans and invest in their businesses. When the Central Bank substantially rises interest rates, there is talk of monetary hardening. When it reduces its reference rate, it is called monetary relaxation.
A central bank is usually politically independent. The members of the Central Bank Policy Council go through a series of panels and hearings before being appointed for a position in the Policy Council. Each member of that council usually has a certain conviction on how the Central Bank should control inflation and the consequent monetary policy. Members who want a very flexible monetary policy, with low types and cheap loans, to substantially boost the economy, while comprising with inflation slightly greater than 2%, are called “pigeons.” Members who prefer higher types to reward savings and want to control inflation at all times are called “hawks” and will not rest until inflation is located at 2% or just below.
Normally, there is a president who directs each meeting, has to create a consensus between the hawks or the pigeons and has the last word when the votes must be divided to avoid a draw to 50 on whether the current policy must be adjusted. The president will pronounce speeches, which can often be followed live, in which he will communicate the current monetary position and perspectives. A central bank will try to boost its monetary policy without causing violent oscillations of the fees, the actions or their currency. All members of the Central Bank will channel their position towards the markets before a monetary policy meeting. A few days before a monetary policy meeting is held and until the new policy has been communicated, the members are prohibited from speaking publicly. It is what is called a period of silence.
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.
