AUD/JPY extends losses to near 100.50, downside seems limited due to hawkish RBA

• AUD/JPY could gain ground due to potential foreign inflows amid an improved Australian share market.
• The AUD finds support from the RBA’s hawkish stance on future interest rate policies.
• The Japanese Yen could face challenges amid uncertainty surrounding the BoJ rate hikes.

AUD/JPY experiences volatility but remains subdued for the third successive day, trading around 100.50 during the early European hours on Monday. However, this downside of the AUD/JPY cross could be restrained as the Australian Dollar (AUD) may appreciate due to potential foreign inflows amid a rally in the domestic share market.

The S&P/ASX 200 Index climbed to fresh all-time highs on Monday as Australian shares mirrored Wall Street's momentum. On Friday, the Dow Jones achieved another record-high close, contributing to the positive sentiment.

The AUD may also find support from the Reserve Bank of Australia’s (RBA) hawkish stance on future interest rate policies, which limits the downside of the AUD/JPY cross. Market participants are now closely monitoring Australia's Monthly Consumer Price Index (CPI) for October, a key indicator that could shape expectations for the RBA’s next monetary policy moves.

The Japanese Yen (JPY) could face headwinds amid uncertainty surrounding the Bank of Japan's (BoJ) plans for rate hikes and a prevailing risk-on market environment. BoJ Governor Kazuo Ueda has hinted at the possibility of another interest rate hike as early as December. Meanwhile, Prime Minister Shigeru Ishiba's administration is reportedly considering a $90 billion stimulus package aimed at mitigating the impact of rising prices on households.

Japan's Leading Economic Index, which assesses the economic outlook based on factors like job offers and consumer sentiment, was revised down to 109.1 for September, compared to the expected 109.4 reading. However, the index showed improvement from the final 106.9 in August—the lowest level since October 2020. Traders are now turning their attention to Tokyo's upcoming inflation and employment data, expected later this week.

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.

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