- AUD/JPY upside potential appears to have stalled near 98.00 ahead of July Australian labor market data.
- Fading global risk aversion has weighed on the Japanese Yen.
- The BoJ is expected to raise interest rates to 1% by the end of the year.
The AUD/JPY pair is trading higher near 97.87 in the European session on Wednesday. The cross is struggling to extend its rise above the immediate resistance of 98.00 as investors have remained on the sidelines ahead of Australian employment data for July, due on Thursday.
Australia’s employment report is expected to show that the labor market added 26.5K new payrolls, down from June’s reading of 50.2K. The unemployment rate is forecast to remain stable at 4.1%. Easing labor market conditions would raise expectations of interest rate cuts by the Reserve Bank of Australia (RBA) sooner rather than later.
Financial markets currently expect the RBA not to cut its official cash rate (OCR) this year. Market speculation about a shift by the RBA towards interest rate cuts next year was fuelled by RBA Governor Michelle Bullock’s hawkish guidance. Bullock said last week that the central bank is vigilant to inflation risks and that interest rates would be raised further if necessary.
Meanwhile, improving market sentiment continues to provide support to the Australian Dollar (AUD). Global risk appetite is improving as fears of a potential US recession fade.
On the Japanese Yen (JPY) front, easing widespread risk aversion has weighed on safe-haven flows into the Yen. The next trigger for the Yen will be preliminary second-quarter Gross Domestic Product (GDP) data, due out on Thursday. The Japanese economy is estimated to have grown by 0.5% after contracting at a similar pace in the previous quarter. Upbeat GDP growth would increase speculation about further policy tightening by the Bank of Japan (BoJ).
At the last monetary policy meeting, the BoJ unexpectedly raised its interest rates by 25 basis points (bps) and announced plans to reduce bond-buying operations. A research note from Danske Bank showed that the BoJ could raise its interest rates to 1% within the next 12 months.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the most traded currencies in the world. Its value is determined broadly by the performance of the Japanese economy, but more specifically by the policy of the Bank of Japan, the spread between Japanese and US bond yields, and risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key to the Yen. The BoJ has intervened directly in currency markets on occasion, usually to lower the value of the Yen, although it often refrains from doing so due to political concerns of its major trading partners. The BoJ’s current ultra-loose monetary policy, based on massive stimulus to the economy, 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 BoJ and other major central banks, which have opted to sharply raise interest rates to fight decades-old levels of inflation.
The Bank of Japan’s stance of maintaining an ultra-loose monetary policy has led to an increase in policy divergence with other central banks, in particular with the US Federal Reserve. This favours the widening of the spread between US and Japanese 10-year bonds, which favours the Dollar against the Yen.
The Japanese Yen is often considered a safe haven investment. This means that in times of market stress, investors are more likely to put their money into the Japanese currency due to its perceived reliability and stability. In turbulent times, the Yen is likely to appreciate against other currencies that are considered riskier to invest in.
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.
