AUD/JPY drops below 96.50, further downside appears due to potential BoJ rate hikes

AUD/JPY depreciates amid rising odds that the BoJ will continue its rate-hiking cycle.
BoJ Himino stated that the central bank would consider raising interest rates if economic conditions and inflation evolve as expected.
The RBA could consider a rate cut in February amid easing inflationary pressures toward the end of 2024.

AUD/JPY declines for the second consecutive day, hovering around 96.30 during European trading hours on Thursday. The AUD/JPY cross’s downside is driven by growing expectations that the Bank of Japan (BoJ) will continue its rate-hiking cycle.

The Japanese Yen (JPY) gained strength after BoJ Deputy Governor Ryozo Himino stated that the central bank would raise interest rates if economic conditions and inflation align with expectations. However, Himino also emphasized that the BoJ remains committed to maintaining an accommodative monetary stance for now, given prevailing domestic and external risks.

Minutes of the December Bank of Japan meeting released on Wednesday showed that members emphasized the need for cautious monetary policy adjustments. Meanwhile, investors are more confident that the BoJ will continue its move toward normalization and deliver additional interest rate hikes in 2025.

Moreover, the AUD/JPY cross’s downside is reinforced by the subdued Australian Dollar (AUD) as easing inflationary pressures toward the end of 2024 have fueled speculation that the Reserve Bank of Australia (RBA) could consider a rate cut in February. The RBA maintained the Official Cash Rate (OCR) at 4.35% since November 2023, emphasizing that inflation must “sustainably” return to its 2%-3% target range before any policy easing.

ANZ, CBA, Westpac, and now National Australia Bank (NAB) all anticipate a 25 basis point (bps) rate cut from the Reserve Bank of Australia (RBA) in February. Previously, the NAB had forecasted a rate cut in May but has now moved its projection forward to the February RBA meeting.

Interest rates FAQs

What are interest rates?

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.

How do interest rates impact currencies?

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.

How do interest rates influence the price of Gold?

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.

What is the Fed Funds rate?

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.