AUD/JPY hovers around 93.00, downside appears due to stronger Japanese Yen
- AUD/JPY may depreciate as the Japanese Yen strengthens, shrugging off weaker domestic data.
- Japan's preliminary Q1 2025 GDP showed a 0.2% quarterly contraction and a 0.7% annualized decline.
- Stronger Australian jobs data prompted markets to dial back RBA rate cut expectations for 2025 to 75 basis points.
AUD/JPY remains subdued around 93.20 during Asian trading hours on Friday, extending its losses for the third successive session. The currency cross has given up its daily gains as the Japanese Yen (JPY) appreciates despite weaker domestic data. Japan’s preliminary GDP data for Q1 2025 showed a quarterly contraction of 0.2%, compared to 0.6% growth in Q4 2024. On an annualized basis, GDP fell 0.7%, missing expectations of a 0.2% decline.
Despite the weak economic print, the Japanese Yen (JPY) is supported by growing expectations that the Bank of Japan (BoJ) may raise interest rates again in 2025. Additionally, prospects for a US-Japan trade deal and recent government comments have helped prop up the Yen.
Japan’s Economy Minister Ryosei Akazawa reaffirmed Japan’s intent to press the US for a review of tariffs and promised liquidity aid for affected businesses. Finance Minister Shunichi Kato also emphasized plans to meet US Treasury Secretary Scott Bessent to address foreign exchange volatility, stressing that excessive FX moves could harm Japan’s economy.
The Australian Dollar (AUD) may gain traction, buoyed by Thursday’s stronger-than-expected labor market data, which helped temper expectations for aggressive rate cuts by the Reserve Bank of Australia (RBA).
Markets have now scaled back their rate cut expectations for the RBA to 75 basis points in total for 2025, down from over 100 basis points projected just weeks ago. Still, caution may prevail as investors brace for the upcoming RBA policy decision next week, where a 25 basis point cut to 3.85% is widely anticipated—potentially capping further AUD gains.
The risk-sensitive AUD is also drawing support from improving global trade sentiment. A preliminary agreement between the US and China aims to reduce tariffs significantly—US duties on Chinese goods will drop from 145% to 30%, while China will cut tariffs on US imports from 125% to 10%. Additionally, renewed optimism over a potential US-Iran nuclear deal has further buoyed market sentiment.
Interest rates FAQs
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.
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.
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.
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.