Australia, Japan Currencies and the RBA’s Latest Interest Rate Decision

In line with expectations, the Reserve Bank of Australia (RBA) hiked its official cash rate by 0.25 percent to 3.1 percent, underscoring the strength of the AUD against the JPY. It’s the eighth month in a row that the RBA has tightened monetary policy to tamp down inflation, last seen at the level of 7.3 percent.

At 10-year highs, Australia’s hawkish interest rate environment has diverged considerably from Japan’s dovish approach, and this has weighed on the JPY at a time when inflation is pushing up the prices of Australia’s exports. Japan is the second largest export market for Australia, and the AUDJPY exchange rate currently favours the Australian Dollar when it comes to food and raw materials.

Japan consumer spending weakening?

Japan’s household spending weakened in October though, falling from 2.3 percent previously to 1.2 percent on an annual basis. Average cash earnings also fell to 1.8 percent growth in October versus 2.1 percent last year. Does this mean that consumer spending is weakening in Japan?

‘Importing’ inflation with goods from Australia and other countries might add further to the pressure on the Bank of Japan to consider raising interest rates. On the other hand, overtime pay in Japan rose by 7.9 percent in October compared with 6.7 percent in the same month last year. In October, unemployment was at the low level of 2.6 percent, adding to the argument that Japan’s job market is holding strong.

Mining sector picking up after pandemic?

Australia’s export market is extremely important to overall economic growth as the country relies heavily on mining raw materials. Australia is one of the world’s largest exporters of coal, bauxite, alumina, iron ore, nickel, silver, lead and gold ore.

Growth in the global market for nickel alone is estimated to grow from 22 billion USD in 2019 to 81 billion USD in 2030. The international market for aluminum is forecast to grow from 123 billion USD in 2019 to 216 billion USD in 2030.

Now that the COVID-19 pandemic is in retreat, Australia’s mining industry is recovering, and this might be a major driver of growth in the medium term. We’ll know more about Australia’s quarter-on-quarter GDP growth rate on Wednesday, when the Q3 results are released.

Previously at the level of 0.9 percent, the consensus sees a growth rate of 0.7 percent in the third quarter. On an annual basis, the market expects Australia’s GDP to have grown by 6.2 percent in Q3 compared with 3.6 percent in the same period last year.

The good news for both Japan and Australia is that crude oil spot prices dipped below 80 USD per barrel recently, raising hopes that at least one of the engines of inflation is slowing down.

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