AUD/JPY softens below 92.50 on risk-off sentiment
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Lallalit Srijandorn
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AUD/JPY softens below 92.50 on risk-off sentiment

  • AUD/JPY loses traction to near 92.30 in Tuesday’s Asian session, down 0.18% on the day. 
  • Japan’s GDP expanded an annualised 2.2% in Q4, slower than the 2.8% growth in the initial estimate. 
  • Tariff threats and China’s deflationary pressure undermine the China-proxy Aussie.

The AUD/JPY trades in negative territory to around cross 92.30 during the Asian trading hours on Tuesday. The Japanese Yen (JPY) strengthens against the Australian Dollar (AUD) due to the prevalent risk-off environment. 

Data released by the Cabinet Office on Tuesday showed that the Japanese economy grew by 0.6% QoQ in the fourth quarter (Q4) of 2024. This figure came in lower than the preliminary reading of 0.7%. On an annual basis, the Japan’s Gross Domestic Product (GDP) expanded 2.2% in Q4 versus the initial estimate of 2.8%. The data reaffirms market bets that the Bank of Japan will keep the policy rate steady at its next policy meeting on March 18-19. 

Analysts expect that the Bank of Japan (BoJ) will raise further interest rates as soon as May amid concerns about broadening inflation in Japan and hopes that bumper wage hikes seen last year will continue this year. This, in turn, might underpin the JPY and act as a headwind for AUD/JPY. 

On the other hand, the Aussie faces some challenges amid escalating global trade tensions and deflationary pressure in China, which might cap the upside for the pair. China's CPI in February missed expectations and fell at the sharpest pace since January 2024. The CPI fell 0.7% in February from a year earlier, reversing January's 0.5% increase, data from the National Bureau of Statistics (NBS) showed on Sunday. 

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.