AUD/JPY holds losses near 100.50 following verbal interventions from Japanese officials

• AUD/JPY depreciates as Japan's Finance Minister Katsunobu Kato cautions to take appropriate action to manage fluctuations in the FX market.
• The JPY may face challenges due to uncertainty around the BoJ rate hike plans.
• The AUD struggles as the Trump administration may impose immediate tariffs of 60% on imports from China.

AUD/JPY retraces its recent gains from the previous session, trading around 100.70 during the early European hours on Tuesday. This dip comes as the Japanese Yen (JPY) gains support following new verbal interventions from Japanese officials. Japanese Finance Minister Katsunobu Kato cautioned that authorities would take "appropriate action" to address sharp fluctuations in the foreign exchange market.

However, the Yen's upside potential remains limited due to uncertainty around the Bank of Japan's (BoJ) rate-hike plans. The presence of a fragile minority government in Japan is expected to complicate any moves toward monetary tightening. Additionally, the BoJ’s Summary of Opinions from its October meeting indicated a split among policymakers on whether to pursue further rate hikes.

Additionally, the Australian Dollar (AUD) faces downward pressure amid concerns about potential tariff increases on Chinese goods by US President-Elect Donald Trump, as China is one of Australia’s largest export markets. Additionally, China’s latest stimulus measures fell short of investor expectations, raising concerns over demand from Australia’s largest trading partner and further weighing on the AUD.

On a positive note, the Westpac Consumer Confidence index rose by 5.3% to 94.6 points in November, marking its second consecutive month of improvement and the highest level in two and a half years. However, the index has stayed below 100 for almost three years, indicating that pessimists still outnumber optimists.

The Australian Dollar's downside may be somewhat limited, as Reserve Bank of Australia (RBA) Governor Michele Bullock reaffirmed a hawkish stance after last week’s interest rate hold. Bullock emphasized the need for restrictive monetary policy in light of persistent inflationary pressures and a strong labor market.

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.