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20 Feb 2025

AUD/JPY trades below 96.00 due to rising odds of more BoJ rate hikes

  • AUD/JPY faces challenges as the BoJ is widely expected to raise interest rates further.
  • The risk-sensitive currency cross amid rising global uncertainties following fresh tariffs from the US President Donald Trump.
  • Australia’s Unemployment Rate increased to 4.1% in January from 4.0% in December, as expected.

AUD/JPY loses ground for the second successive day, trading around 95.80 during the European hours on Thursday. This downside of the currency cross could be attributed to the growing acceptance that the Bank of Japan (BoJ) would hike interest rates further.

Additionally, the Japanese Yen (JPY) gains ground as the hawkish Bank of Japan (BoJ) expectations push the Japanese government bond (JGB) yields to their highest levels in more than a decade. The resultant narrowing of the rate differential between Japan and other countries provides an additional boost to the JPY.

Additionally, the AUD/JPY cross depreciates as the risk-sensitive Australian Dollar (AUD) faces challenges, while the safe-haven Japanese Yen gains ground due to a fresh wave of the global risk aversion trade, triggered by US President Donald Trump's tariff threats. Trump confirmed that a 25% tariff on pharmaceutical, semiconductor, and auto imports will take effect in April, further escalating global trade tensions.

The downside of the AUD/JPY cross could be restrained as the Australian Dollar (AUD) gains ground against its peers following the release of domestic employment data. Australia’s seasonally adjusted Unemployment Rate rose to 4.1% in January from 4.0% in December, aligning with market expectations. Additionally, Employment Change came in at 44K for January, down from a revised 60K in December (previously 56.3K), but still exceeding the consensus forecast of 20K.

Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser stated while speaking to Bloomberg News on Thursday that the central bank’s policy “is still restrictive.” Hauser noted that the latest jobs data showed little cause for concern. Hauser also emphasized that Australia’s monthly CPI data remains incomplete, requiring a wait for quarterly figures to gain a clearer picture. While market expectations suggest three to four rate cuts, the RBA remains uncertain. The central bank’s primary focus is still on inflation, while global economic uncertainty poses potential risks to Australia’s economy.

Interest rates FAQs

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

 

Feb 20, 2025

Pound Sterling flattens against USD as investors seek fresh cues on Trump’s tariff policies

The Pound Sterling (GBP) trades in a tight range around 1.2600 against the US Dollar (USD) in Thursday’s European session.
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China SMEI: Activity slows in February – Standard Chartered

Headline SMEI edged down 0.5pts to 50.4 in February as current performance sub-index fell below 50.
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