- The AUD/JPY cross could rally as traders anticipate the RBA could avoid implementing rate cuts in 2024.
- Polls in Japan indicate that the LDP-led coalition could lose its majority in this weekend’s general election.
- Australia’s Judo Bank services PMI rose to 50.6 in October, marking its ninth consecutive month of expansion.
AUD/JPY breaks its three-day winning streak, trading around 101.20 during European hours on Thursday. The Japanese yen (JPY) gained some traction as buyers may have responded to verbal intervention from Japanese officials earlier in the day.
However, the Japanese Yen’s rally could be limited due to growing concerns over political instability, further darkening the outlook for the Bank of Japan’s (BoJ) monetary policy. In Japan, recent polls indicate that the ruling coalition led by the Liberal Democratic Party (LDP) could lose its majority in this weekend’s general election.
Japan’s Finance Minister Katsunobu Kato expressed concern about rapid and unilateral movements in the currency market, emphasizing the importance of stable currency movements that align with economic fundamentals, according to Reuters.
Additionally, on Thursday, Japan’s Deputy Cabinet Secretary Kazuhiko Aoki stated that the government is closely monitoring exchange rate fluctuations, including speculative activities, with a sense of urgency.
The decline in the AUD/JPY cross could be limited as the Australian Dollar (AUD) receives support from the prevailing hawkish sentiment around the Reserve Bank of Australia (RBA), boosted by positive employment data. Earlier this week, RBA Deputy Governor Andrew Hauser noted that the labor participation rate is remarkably high and emphasized that while the RBA is dependent on data, it is not obsessed with it.
In terms of data, the Judo Bank of Australia Composite PMI rose slightly to 49.8 in October, from 49.6 in September, signaling a second consecutive month of contraction in private sector output. The services PMI rose to 50.6 from 50.5, marking its ninth consecutive month of expansion, while the manufacturing PMI fell to 46.6 from 46.7, continuing its decline.
Inflation FAQs
Inflation measures the rise in prices of a representative basket of goods and services. General inflation is usually expressed as a month-on-month and year-on-year percentage change. Core inflation excludes more volatile items, such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the target level of central banks, which are mandated to keep inflation at a manageable level, typically around 2%.
The Consumer Price Index (CPI) measures the variation in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage of inter-monthly and inter-annual variation. Core CPI is the target of central banks as it excludes food and fuel volatility. When the underlying CPI exceeds 2%, interest rates usually rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite occurs when inflation falls.
Although it may seem counterintuitive, high inflation in a country drives up the value of its currency and vice versa in the case of lower inflation. This is because the central bank will typically raise interest rates to combat higher inflation, attracting more global capital inflows from investors looking for a lucrative place to park their money.
Gold was once the go-to asset for investors during times of high inflation because it preserved its value, and while investors often continue to purchase gold for its safe haven properties during times of extreme market turmoil, this is not the case. most of the time. This is because when inflation is high, central banks raise interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity cost of holding Gold versus an interest-bearing asset or placing money in a cash deposit account. On the contrary, lower inflation tends to be positive for Gold, as it reduces interest rates, making the shiny metal a more viable investment alternative.
