- The AUD/JPY pair extended its decline near 94.25 in early European trading on Monday, down 0.18% on the day.
- Economists expect the BoJ to raise interest rates further later this year.
- Concerns about a slowing Chinese economy are weighing further on the Australian dollar (proxy for China).
The AUD/JPY pair extended its decline around 94.25 on Monday during the early European session. Stronger Japanese Yen (JPY) and hawkish vibes ahead of the Bank of Japan (BoJ) key interest rate decision on Friday dragged the pair lower.
The Bank of Japan is unlikely to raise interest rates at its September policy meeting on Friday, but most economists polled by Reuters still expect a hike by year-end. This, in turn, supports the yen and weighs on the AUD/JPY pair. Junki Iwahashi, senior economist at Sumitomo Mitsui Trust Bank, said the Japanese central bank is expected to proceed cautiously with rate hikes at a pace of about once every six months as it assesses the impact of monetary tightening on the domestic economy.
As for the Australian dollar, renewed signs of deflation and a sluggish Chinese economy continue to undermine the Australian dollar (AUD), which is Australia’s largest trading partner. It should be noted that China is Australia’s largest trading partner and negative developments around the Chinese economy generally weigh on the AUD.
Australian employment data is due for release on Thursday. The country’s unemployment rate is forecast to remain stable at 4.2% in August, while employment change is estimated to show an increase of 30,800 in the same month from 58.2% in July. If Australian labour market data shows stronger momentum, this could boost the Australian dollar and limit the pair’s downside.
Frequently Asked Questions About the Australian Dollar
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). Because Australia is a resource-rich country, another key factor is the price of its main export, iron ore. The health of the Chinese economy, its main trading partner, is a factor, as is inflation in Australia, its growth rate, and the trade balance. Market sentiment (whether investors are buying riskier assets) or looking for safe assets (risk aversion) is also a factor, and risk acceptance is 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 primary goal 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 Australian dollar, 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 Australian dollar and the latter positive for the Australian dollar.
China is Australia’s largest trading partner, so the health of the Chinese economy has a major influence on 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 Australian dollar 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 China’s growth data often have a direct impact on the Australian dollar and its peers.
Iron ore is Australia’s largest export, worth $118 billion per year as of 2021, and its main destination is China. Therefore, the price of iron ore can be a driving factor for the Australian dollar. Typically, if the price of iron ore rises, the Australian dollar rises as well, as aggregate demand for the currency increases. The opposite is true if 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 Australian dollar.
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 export products, its currency will gain value simply because of the excess demand created by foreign buyers looking to buy its exports compared to what it spends to buy imports. A positive net trade balance therefore strengthens the Australian dollar, with the opposite effect if the trade balance is negative.
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