- The AUD/JPY currency pair dipped to a four-week low, even as iron ore prices climbed. This drop largely came from a stronger Japanese yen and a pullback in global carry trades
- Signals from the BoJ hint at a possible interest rate hike in September, boosting the yen and making currency intervention less likely. Meanwhile, the RBA holds at 4.35%, pointing at stubborn inflation
- The AUD/JPY's downward slide could extend into September. This depends on the BoJ confirming monetary tightening and China's economic data staying weak
The Australian dollar dropped against the Japanese yen this week, which might seem a bit odd. After all, Australia’s main export, iron ore, recently topped US$100 per tonne, reaching its highest intraday price since early July.
Normally, strong commodity prices like that would boost the Aussie dollar. Yet, the AUD/JPY exchange rate has instead fallen to four-week lows, slipping below 111.00. So, what’s going on?
Why Has AUD/JPY Turned Bearish?
The AUD/JPY isn’t weakening because Australia’s economy is struggling. Instead, it’s the Japanese yen that’s gaining significant strength. Talk of the Bank of Japan (BoJ) raising interest rates has surged after central bank officials made clear statements, even hinting at possible consecutive rate hikes.
With Japan’s GDP and wage growth picking up, market watchers now expect a 25-basis-point rate increase to 1.25% at the next BoJ policy meeting. Plus, the Ministry of Finance’s interventions in July and August, which caused a record drop in foreign reserves, also helped the yen rebound from multi-year lows.
As the interest rate gap narrows and Japanese yields climb, carry trades, which once favored the higher-yielding Australian dollar, are unwinding much faster.
What this Means For BoJ and RBA Decisions
For the BoJ, a consistently strong yen means less immediate pressure to intervene further in the currency market. This also aligns with their plan for a gradual return to normal policy.
A stronger yen helps manage import costs, letting the central bank focus on domestic inflation trends. Markets have already priced in a September rate hike. Any further increases later this year will probably hinge on new data regarding wages, services inflation, and economic growth.
The Reserve Bank of Australia (RBA) faces a different set of considerations. Strong commodity prices certainly help the nation’s terms of trade, but a weaker currency against key Asian trading partners could push up imported inflation.
Still, with domestic economic indicators looking stable, the RBA isn’t expected to change its policy cash rate. Their focus remains on controlling inflation, rather than directly managing the currency.
All eyes will be on the RBA’s policy meeting in late September, awaiting any shifts in its economic outlook. Another rate hike remains possible if domestic data stays strong, though markets currently see only a moderate chance of this happening.
Will the Downturn Extend?
The AUD/JPY pair will likely continue facing downward pressure in the short term. Should the BoJ confirm an interest rate hike, combined with any signs of weaker activity in China or less demand for iron ore, the pair could drop towards lower support levels around 110.
A stronger yen would also make carry trades less appealing. Conversely, stronger-than-expected Australian economic data or new stimulus from China might help stabilize the Australian dollar.
This downward trend for AUD/JPY appears set to continue through September, primarily driven by central bank policy decisions.
The long-term trajectory will depend on improvements in iron ore markets and the pace at which the BoJ normalizes policy relative to the RBA. Both central banks’ September meetings should offer significant insight into these future directions.
The yen’s strength is pulling the pair lower. This isn’t about Australian fundamentals. Instead, it’s driven by hawkish Bank of Japan signals, including expectations for a rate hike and the impact of past interventions.
The Australian dollar saw some temporary support from higher iron ore prices. But market expectations for a Bank of Japan rate hike, coupled with a stronger yen had more sway.
A stronger yen reduces the need for direct currency intervention. It also helps the BoJ pursue steady rate increases, focusing on domestic inflation rather than just defending the currency.