AUD/JPY tumbles to near 98.00 as China’s factory activity contracts in January
- AUD/JPY faces some selling pressure to around 98.10 in Monday’s Asian session, losing 0.32% on the day.
- The uncertainty surrounding the impact of Trump's trade and immigration policies could support the JPY.
- Investors await the Australian Q4 CPI inflation data on Wednesday for fresh impetus.
The AUD/JPY cross attracts some sellers to near 98.10 during the Asian trading hours on Monday. The Japanese Yen (JPY) edges higher amid the safe-haven flows demand. Traders will keep an eye on Australian Consumer Price Index (CPI) inflation data for the fourth quarter, which will be released later on Wednesday.
US President Donald Trump on Sunday imposed sweeping retaliatory measures on Colombia, including tariffs and sanctions, after the South American country refused to allow two military planes carrying deported migrants to land. However, the White House said on Monday that Colombia agreed to accept illegal migrants returned from the US. The uncertainty surrounding the impact of US President Donald Trump's trade and immigration policies could boost the JPY, a traditional safe-haven currency, and create a headwind for the cross.
China’s factory activity unexpectedly contracted in January, reversing the growth seen in the previous three months. This, in turn, exerts some selling pressure on the China-proxy Australian Dollar (AUD) as China's economic performance significantly impacts the Australian economy. “The disappointing PMI data underscores the difficulty policymakers face in achieving a sustained recovery in growth,” Zichuan Huang, China economist at Capital Economics, said in a note.
The attention will shift to the Australian Q4 CPI data on Wednesday. In case of a softer-than-expected outcome, this could raise the bets on a February Reserve Bank of Australia (RBA) rate cut and further undermine the Aussie.
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.