AUDJPY has been on a heavy downward trend over four consecutive days. The pair lost 4019 pips within the last seven days, falling from $95.50 recorded the previous week to a new low of $91.48 during the Asian session today. The bears seem to have had their fair share from this pair rendering the bulls powerless.
Investors eagerly await the monetary policy committee meeting outcome today. The Reserve Bank of Australia is expected to hike its interest rate by at least 50 basis points. This will be the only saviour for this pair from the hands of the devouring bears.
During its July session, the RBA hiked its interest rate by 50 basis points. It further increased its interest rate on Exchange Settlement balances by 50 basis points bringing the rate to 1.25%. This was intended to curb the country’s rising inflation, which rose to 6.1% YoY in June. The second quarter’s Consumer Price Index (CPI) rose to 1.8%. The annual trimmed mean inflation rate, which excludes significant price rises and falls, rose to 4.9% marking the highest point since the ABS first published its series in 2003.
The primary cause of the inflation in the country came from three major areas:
- New dwelling purchases by owner-occupiers increased by 5.6%.
- Automotive fuel increased by 4.2%.
- Furniture, which increased by 7.0%.
Rising inflation globally is driven by obstructions to global supply chains, a series of lockdowns, especially in China, and the Russian-Ukraine war, which increased the cost of oil. Hence, all the country’s monetary policy committees have consistently fought the rising inflation through aggressive interest rate hikes to meet the minimum target for the inflation rate.
While we admit that the inflation rate is high in Australia, it is not as high as in other countries today, especially in Europe and the US.
According to the media statement by Philip Lowe, the Australian inflation rate is expected to peak later this year and decline back towards the range of 2–3 % in the coming year.
Lowe remained very optimistic that: as the global supply-side problems continue to ease and commodity prices gradually stabilise, the inflation rate will likely moderate soon.
Lowe highlighted the need for increasing the interest rate, which will help to establish a more sustainable balance between the rate of demand for various goods and services and the supply rate.
However, he remained resolute that the Australian Medium-term inflation expectations remain solidly anchored and will have to remain the same in all the committee’s sessions. In his submissions:
“The Board expects to take further steps in normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market. The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
This substantive statement has thrown the BoardBoard open for further interest rate hikes for the Australian dollar during its session today. Investors are currently pricing a repetition of the 50 basis points interest rate hike. In comparison, some are pricing higher up to 75 basis points, just like the Fed did last week.
The monetary policy committee seemed convinced that the Australian economy is strong enough to withstand further interest rate hikes. They repoed much confidence in the labour market, describing it as more resilient than ever to fight more interest rate hikes. This is supported by the progress in job creation, with the unemployment rate remaining stable at 3.9% in May, marking its lowest level in over 50 years. This substantial improvement in the labour market removes the fears of recessions entirely.
The Australian Underemployment rate has also fallen significantly in recent months. This increased the confidence in the labour market to withstand more interest rate hikes in the coming session.
How will the Interest rate hike impact AUDJPY?
The Australian dollar (AUD) is currently fragile compared to its counterpart – the Japanese Yen (JPY). To embark on Quantitative Easing, the BoJ left its rate untouched, boosted the economy and attracted more investors, which has given the Yen an edge over the Australian dollar in the past week.
However, a further interest rate hike for the Australian dollar today will help to strengthen it against the Japanese Yen. This means we can hope for a gradual recovery at the present support level.
AUDJPY is currently sitting at critical support at $91.47, hoping to be rescued by an aggressive interest rate hike by the RBA today. The bulls will be expected to take over from this point, hoping that the interest rate is hiked today.
Should the RBA turn dovish towards its interest rate today and fail to hike it by at least 50 basis points, we can expect more downside for AUDJPY.
