AUD/JPY: Aussie Up as RBA Minutes Show No Signs of Another Rate Cut

The Australian dollar is believed to maintain its strength opposite the Japanese yen today as the Reserve Bank of Australia did not provide fresh hints of further rate cuts in the minutes of its December policy meeting. In contrast, views of additional monetary easing by the Bank of Japan are seen to weigh on the Yen after Shinzo Abe’s party secured a clear victory in Sunday’s elections.

The minutes of the RBA’s December 4 meeting revealed that the central bank was concerned industries away from the mining boom continued to struggle. The board cut the cash rate from 3.25 percent to 3.0 percent, the lowest level since April 2009, to support underperforming sectors of the economy, including housing construction and retail, ahead of the expected peak in the resources boom. According to the minutes, the RBA also believed the soft jobs market and slower wage growth meant a rate cut was unlikely to stoke high inflation. Nevertheless, in a sign that the decision to slash rates was a close call, the minutes mentioned that the stabilization of the Chinese economy, moderate economic growth in the US, and the steady financial markets provided some reason to stay put.

The markets have factored in another one or two cuts by mid-2013, putting the cash rate at 2.5 or 2.75 percent, while on Monday, the ANZ projected interest rates to be at 2 percent by the end of the year. However, those looking for were confirmation are likely to be disappointed as the minutes made no explicit mention of the chance of more cuts, when it might be expected, or what the key factors guiding the decision could be. There was also no mention of the slowdown of the Australian economy, one key factor influencing market expectations of more cuts. Hence, with the RBA providing no clear indications of what is to come, the Aussie is deemed to gain.

Over to Japan, a day after voters returned the Liberal Democratic Party to Power, next prime minister Shinzo Abe pressed ahead with his priority of reviving the sluggish economy, vowing a hefty package and increasing pressure on the central bank for quick action to pull the country out of recession and deflation. Further piling pressure on the BOJ, Abe said during a news conference that expects the bank to reach an appropriate decision come Thursday when it ends a two-day meeting. He also vowed to force an accord with the BOJ to double its looser goal of 1 percent inflation and to undertake unlimited monetary easing to achieve it. With the central bank widely believed ease policy this week, the Yen is deemed to drop, warranting a long position for the AUD/JPY.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.