AUD/JPY hovers around 100.50, maintains position ahead of RBA decision

• AUD/JPY remains steady as the Australian Dollar receives support from the hawkish mood surrounding the RBA.
• The Reserve Bank of Australia is widely anticipated to maintain the cash rate at 4.35% on Tuesday.
• The Japanese Yen may depreciate due to rising political and monetary policy uncertainties.

AUD/JPY extends its gains for the second consecutive day, trading around 100.40 during the early European hours on Monday. The Australian Dollar (AUD) receives support as the Reserve Bank of Australia (RBA) is expected to maintain the cash rate at 4.35% during Tuesday’s policy meeting, as underlying inflation, reflected in the trimmed mean, remains high. This anticipated hawkish stance from the RBA continues to support the Aussie Dollar, bolstering the AUD/JPY cross.

Additionally, the release of the Melbourne Institute’s Inflation Gauge data might have contributed support for the Australian Dollar. The TD-MI Inflation Gauge rose by 0.3% month-over-month in October, up from a 0.1% increase in the prior month, marking the highest reading since July and preceding the RBA's November policy meeting. Annually, the gauge climbed by 3.0%, compared to the previous 2.6% reading.

In China, the Standing Committee of the National People's Congress is meeting from November 4 to 8, during which it is expected to approve additional stimulus measures aimed at bolstering the slowing economy. Any additional measures taken could have a positive impact on Australian markets as both countries are close trade partners.

On Sunday, China’s Commerce Minister Wang Wentao met with Australia’s Trade Minister Don Farrell. China expressed hopes that Australia will continue enhancing its business environment and ensure fair and equitable treatment for Chinese companies.

Japanese markets are closed for the Sports Day holiday, halting physical trading of US Treasuries and slightly limiting JPY liquidity. The Japanese Yen may face weakness as political and monetary policy uncertainties rise, following last week’s parliamentary majority win by the Liberal Democratic Party (LDP) coalition, which has led to questions about the Bank of Japan’s (BOJ) future policy stance.

In a briefing last Thursday, BoJ Governor Kazuo Ueda noted that economic risks in the US appear to be easing, potentially opening the door for a future rate hike. Meanwhile, as expected, the Bank of Japan maintained its policy rate at 0.25%.

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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