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Business confidence at large manufacturers in Japan improved in the second quarter (Q2) of 2024, according to the Bank of Japan's quarterly Tankan survey on Monday.
The headline large Manufacturers' Sentiment Index came in at 13.0 in Q2 from the previous reading of 11.0.
Further details unveil that the large Manufacturing Outlook for the second quarter (Q2) arrived at 14.0 versus 10.0 prior.
Market reaction to Japan’s Tankan survey
At the time of press, the USD/JPY pair was down 0.02% on the day at 160.82.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
China’s official Manufacturing Purchasing Managers' Index (PMI) remained steady at 49.5% in June, compared to 49.5.
The reading missed the market consensus of 51.0 in the reported month, by a wide margin. The NBS Non-Manufacturing PMI dropped to 50.5 in June versus April’s 51.2 figure and the estimates of 51.5.
Market reaction
At the time of writing, the AUD/USD pair is trading around 0.6680, up 0.14% on the day.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
- AUD/USD extends the rally around 0.6675 in Monday’s early Asian session.
- The US Core PCE inflation rose 2.6% YoY in May, compared to 2.6% in April.
- The stubborn inflation in Australia pushed back the expectation that the RBA would cut rates, boosting the Aussie.
The AUD/USD pair trades on a stronger note near 0.6675 during the early Asian session on Monday. The growing speculation that the US Federal Reserve (Fed) would cut interest rates in 2024 weighs on the Greenback across the board.
Inflation in the United States eased to its lowest annual rate in more than three years. The US Personal Consumption Expenditures (PCE) Price Index increased 2.6% YoY in May, compared to 2.7% in April, according to the US Bureau of Economic Analysis on Friday. This figure came in line with market expectations. The core PCE inflation rose 2.6% YoY in May from 2.8% in April, in line with estimation.
The US inflation report indicated a slow downward trend in consumer price growth in the US, triggering the chance of a Fed rate cut later this year. This, in turn, exerts some selling pressure on the US Dollar (USD) and acts as a headwind for AUD/USD. Investors are now pricing in 53% odds that the Fed will cut rates in the September meeting, according to the CME FedWatch tool.
On the Aussie front, the elevated inflation in Australia pushed back the expectation that the Reserve Bank of Australia (RBA) would cut the interest rate, which lifts the Australian Dollar (AUD). Last week, RBA Assistant Governor Christopher Kent said that the Australian central bank is alert to upside risks to inflation and wants to see evidence of a further easing in inflation before considering interest rate cuts. The RBA is foreseen to delay rate cuts, making it one of the last G10 country central banks to adopt a reduction policy. These delayed cuts might enhance the further strengthening of the Aussie.
Marine Le Pen’s far-right National Rally (RN) party is projected to have won 34% in the first round of France’s parliamentary elections on Sunday, initial projections showed, per CNN.
Meanwhile, French President Emmanuel Macron’s centrist alliance suffered staggering losses, coming third with 20.3% of the vote. The left-wing coalition of the New Popular Front (NFP) made a strong showing with 28.1% of the vote.
According to their projections, the far-right would win between 230 and 280 seats in the National Assembly, leaving it short of the 289 seats needed for an absolute majority.
Market players will keep an eye on the second round of elections on July 7. The RN will try to win an absolute majority to run the National Assembly without needing coalition partners.
Market reaction to French election 2024
At the time of press, the EUR/USD pair was up 0.20% on the day at 1.0735.
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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