- AUD/JPY regains positive ground on Wednesday amid the emergence of some JPY selling.
- The RBA’s hawkish stance and uncertainty over the BoJ’s rate hike remain supportive.
- Geopolitical risks and a softer risk tone could limit any significant gains.
The AUD/JPY pair is attracting some dip-buying during the Asian session on Wednesday and for now, it seems to have arrested the previous day’s rejection slide from the 99.00 level, or a near three-week high. Spot prices, however, remain confined within a narrow band held for the past week or so and are currently trading around the 98.20 area, up just over 0.20% on the day.
The Australian Dollar (AUD) continues to receive support from the Reserve Bank of Australia’s (RBA) hawkish stance, showing a willingness to hike interest rates in the face of further upside risks to inflation. This, coupled with increasing rumours of large economic stimulus measures by the Chinese government, turns out to be another factor supporting the AUD, a proxy for China. Apart from this, the emergence of some selling around the Japanese Yen (JPY) helps the AUD/JPY pair to regain some positive traction.
Meanwhile, political uncertainty triggered by Japanese Prime Minister Fumio Kishida’s decision to step down could lead to a pause in the Bank of Japan’s (BoJ) plan to steadily raise interest rates, which, in turn, is seen weighing on the JPY. Adding to this, government data released on Wednesday showed that Japan’s trade deficit ballooned to ¥621.84 billion in July amid a smaller-than-expected 10.3% increase in exports and a 16.6% jump in outbound shipments, driven by a weaker yen rather than a robust increase in volume.
Investors, however, seem convinced that an improving macroeconomic environment in Japan should encourage the BoJ to raise interest rates again later this year. This, coupled with lingering geopolitical risks and a slight deterioration in global risk sentiment, should help limit any significant downside in the JPY and keep a lid on the AUD/JPY cross. This makes it prudent to wait for a convincing break through the near-term range before positioning for an extension of the recovery from a more than one-year low hit this August.
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.
