- AUD/JPY softens to around 93.00 in Tuesday’s Asian session, down 0.55% on the day.
- RBA cut its OCR by 25 bps to 3.85% at the May meeting.
- BoJ’s Uchida said the central bank will continue to raise interest rates if the economy rebounds from the tariff hit.
The AUD/JPY cross faces some selling pressure to near 93.00 during the Asian trading hours on Tuesday. The Australian Dollar (AUD) edges lower against the Japanese Yen (JPY) after the Reserve Bank of Australia’s (RBA) interest rate decision. The attention will shift to RBA Governor Michele Bullock’s press conference at 05:30 GMT.
As widely expected, the RBA board members decided to lower the Official Cash Rate (OCR) by 25 basis points (bps) from 4.10% to 3.85% at its May policy meeting on Tuesday. According to the Summary of the RBA monetary policy statement, escalation of global trade conflict is a key downside risk to the economy. Furthermore, the global growth outlook has been downgraded, and uncertainty has increased due to US tariff policies. The Aussie weakens in immediate reaction to the RBA rate cut.
The growing speculation that the Bank of Japan (BoJ) will raise interest rates again this year provides some support to the JPY and creates a headwind for the cross. BoJ Deputy Governor Shinichi Uchida said on Monday that Japan’s underlying inflation is likely to re-accelerate after a period of slowdown and that the Japanese central bank will keep raising interest rates if the economy and prices improve as projected.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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