The AUD/JPY currency pair is experiencing a bullish trend, with the Australian Dollar (AUD) strengthening against the Japanese Yen (JPY). This is primarily due to the interest rate differential between the Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ), with the RBA holding the Official Cash Rate (OCR) steady at 4.35% after recent hikes. However, the potential for Japanese authorities to intervene could limit the AUD's upside.
The RBA's decision to hold the OCR steady at 4.35% after three consecutive 25 basis point hikes earlier this year has been influenced by rising oil and fuel prices, which could lead to a fourth rate hike this year if US President Donald Trump's conflict with Iran persists. This has led traders to increase their bets on an RBA rate hike, with odds now at nearly 23% in August and over 50% by December.
The AUD/JPY pair's bullish bias is evident in its daily chart, where it remains above the 100-day simple moving average (SMA) and the Bollinger Bands' 20-day middle band, maintaining the broader uptrend. The price is advancing towards the Bollinger upper band, with the Relative Strength Index (14) around 60 indicating firm but not overstretched upside momentum.
On the upside, the immediate resistance is at the Bollinger Bands' upper band at 114.10, followed by the May 13 high of 114.74 and the psychological level of 115.00. On the downside, initial support is at the July 20 low of 113.10, with the 100-day SMA at 112.75 and the Bollinger middle band at 112.55 serving as the next contention levels.
The AUD's strength is influenced by various factors, including interest rates set by the RBA, which impact the level of interest rates in the economy. Relatively high interest rates compared to other major central banks support the AUD, while the opposite is true for relatively low rates. The RBA's use of quantitative easing and tightening also influences credit conditions, with quantitative easing being AUD-negative and tightening being AUD-positive.
The health of the Chinese economy, Australia's largest trading partner, is another significant factor. When the Chinese economy is strong, it increases demand for Australian raw materials, goods, and services, lifting the AUD's value. Conversely, a slowing Chinese economy can negatively impact the AUD. The price of Iron Ore, Australia's largest export, is also a driver of the AUD, with higher prices generally leading to a stronger AUD and a positive Trade Balance.
The Trade Balance, which is the difference between exports and imports, plays a crucial role in the AUD's value. A positive Trade Balance strengthens the AUD due to the surplus demand created by foreign buyers seeking Australian exports. However, a negative Trade Balance has the opposite effect. Market sentiment, particularly risk-on or risk-off scenarios, also influences the AUD, with risk-on being positive for the currency.
In conclusion, the AUD/JPY pair's bullish trend is supported by various factors, including interest rate differentials, the Chinese economy's health, Iron Ore prices, and the Trade Balance. However, the potential for Japanese intervention could limit the AUD's upside, making it a critical factor to monitor in the coming months.
