Dovish comments from the Bank of Japan (BoJ) have helped to push the Australian Dollar to Japanese Yen (AUD/JPY) exchange rate higher, following a disappointing Australian Trade Balance.
Although traders were not surprised that the Reserve Bank of Australia (RBA) opted to leave interest rates unchanged on Tuesday the more dovish tone of policymakers prompted the ‘Aussie’ (AUD) to trend lower against rivals. RBA Governor Glenn Stevens was rather less upbeat than he had been in December with regards to monetary policy, indicating that an interest rate cut might be possible in the near future if global economic conditions remained turbulent.
As markets returned to a more risk-averse state the Japanese Yen (JPY) was shored up by a resurgence in safe-haven demand, erasing much of the losses the currency had made in the wake of the Bank of Japan’s (BoJ) decision to implement negative interest rates on Friday.
Wednesday was a somewhat mixed day for the Australian Dollar, as a markedly improved Australian Services PMI contrasted with a disappointing Trade Balance. Defying expectations of a modest narrowing the Australian trade deficit instead widened from -2,727 million to -3,535 million Australian Dollars, a fresh indication of the negative impact the current global slowdown has been having on the domestic economy. However, as the latest Chinese Services PMI proved largely better than forecast the antipodean currency was bolstered on the back of a sharp upturn in demand for higher-yielding assets.
Both the Japanese Services and Composite PMIs showed improvement on the month for January, although the Consumer Confidence Index weakened somewhat. Investors were more concerned with commentary from BoJ Governor Haruhiko Kuroda in which the policymaker indicated that further monetary loosening remained possible, in spite of the shock move into negative rates. This commitment to easing prompted a fresh wave of Yen weakness, boosting the AUD/JPY exchange rate onto an uptrend.
The latest NAB Business Confidence Index is likely to provoke some additional Australian Dollar volatility, particularly if sentiment retreats further from the previous month’s reading of 0. Ahead of the weekend the US Non-Farm Payrolls report may dent the appeal of the ‘Aussie’, as stronger US employment is likely to improve the odds of the Fed opting to raise interest rates again sooner rather than later.
Meanwhile, the Yen could soften further if Friday’s Leading and Coincident Indexes show a decline as forecast, indicating that the Japanese economy continues to weaken in spite of the BoJ’s efforts. Consequently the AUD/JPY currency pair may make additional gains.
At the time of writing, the Australian Dollar to Japanese Yen (AUD/JPY) exchange rate was making gains around 84.7145, while the Japanese Yen to Australian Dollar (JPY/AUD) pairing was trending in the region of 0.0118.
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