AUD/JPY inches lower to near 100.50 due to risk aversion sentiment
03.10.2024, 08:31

AUD/JPY inches lower to near 100.50 due to risk aversion sentiment

  • AUD/JPY depreciates due to risk-off mood amid rising geopolitical tensions.
  • Israel's security cabinet decided to take decisive action in response to the recent Iranian attack.
  • The Japanese Yen struggles as PM Ishiba expressed that the current environment doesn’t require further interest rate increases.

AUD/JPY trims its intraday gains, holding some gains around 100.50 during the European hours on Thursday. The risk-sensitive Australian Dollar (AUD) depreciates as the rising geopolitical tensions have dampened the risk appetite and undermined the AUD/JPY cross.

The Israeli Broadcasting Authority (IBA) reported that Israel's security cabinet has resolved to take decisive action in response to the recent Iranian attack. On Tuesday night, Iran launched more than 200 ballistic missiles and drone strikes targeting Israel.

However, the downside risk for the AUD may be limited due to the hawkish outlook surrounding the Reserve Bank of Australia (RBA). Data released earlier this week showed stronger-than-expected retail sales growth for August, lowering the likelihood of an early rate cut by the RBA.

On Thursday, Australia’s Trade Balance for August stood at 5,644 million month-over-month, surpassing market expectations of 5,500 million and slightly higher than July’s surplus of 5,636 million. However, both Exports and Imports declined by 0.2% month-over-month in August. Markets have almost fully discounted the possibility of a rate cut in November.

The AUD/JPY cross received support as the Japanese Yen (JPY) faced challenges following blunt comments on monetary policy from the new Prime Minister (PM) Shigeru Ishiba, who met with Bank of Japan (BoJ) Governor Kazuo Ueda on Wednesday.

Japan’s Prime Minister Ishiba stated, "I do not believe that we are in an environment that would require us to raise interest rates further," according to Reuters. In the previous session, the Japanese Yen fell nearly 2% against the US Dollar (USD), marking its largest drop since February of last year.

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.

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