The Australian dollar shines and the Japanese yen collapses!

Market Updates on Foreign Currencies

• The Australian currency tops the list of winning currencies.
• Renewed inflationary pressures on the Australian Reserve.
• The Japanese currency suffers severe losses due to the Bank of Japan.
• The yen records historic lows against most currencies.

Last week, we observed a distinct shine for the Australian dollar in foreign exchange markets, topping the list of global winning currencies, surpassing all primary and secondary currencies.

This brilliance sparked inquiries and questions regarding the reasons for this strong performance of the Australian currency, which can be summarized in a key point: the renewal of inflationary pressures on the Federal Reserve and the fading likelihood of Australian interest rate reductions this year.

Revisiting the list of winning currencies, the Japanese yen found itself at the bottom, presenting one of its worst weekly performances in the history of the currency, due to outcomes from the Bank of Japan meeting which were less aggressive than anticipated, reducing the chances of another interest rate hike in Japan this year.

Before delving further into the reasons supporting the Australian dollar and heavily impacting the Japanese yen, let us first review the performance of the eight major currencies in the foreign exchange market over the past week.

The Australian dollar saw an increase of 18 points on the "FX News Today" weekly index measuring currency strength, followed by the British pound in second place with 9 points, and the New Zealand dollar in third with 7 points. The Japanese yen occupied the last spot with a negative 29 points.

Detailed Performance of the Australian Dollar

Looking into the details of the Australian dollar's performance last week against the seven major currencies, it decisively outperformed the Japanese yen with a rise of 4.25%, and on Friday, April 26, it reached its highest level in 11 years at 103.64 yen, surpassing the psychological barrier of 100 yen for the first time since 2024.

It rose by 2.3% against the Swiss franc, marking the highest level in two weeks at 1.6732 dollars on Friday, increased by 1.8% against the U.S. dollar reaching the highest level in two weeks at 65.54 cents.

It improved by 1.45% against the euro, recording on Friday, April 19, the highest level in three months at 1.1169 francs, and rose by 1.20% against the Canadian dollar, reaching the highest level in two weeks at 0.8947 dollars.

It increased by 0.9% against the New Zealand dollar, recording the highest level in ten months at 1.0999 dollars on Friday, and rose by 0.8% against the British pound, reaching the highest level in three months at 1.9085 dollars on the same day.

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Inflation Trends in Australia

Data from the Australian National Statistics Office last week showed that the annual consumer price index increased by 3.5% in March, higher than the market expectations of a 3.4% rise, and the index had a 3.4% increase in February.

On a quarterly basis, the consumer price index rose by 1.0% in the first quarter of this year, surpassing market expectations of a 0.8% rise, and the index increased by 0.6% in the last quarter of the previous year.

The persistent high costs of services in Australia are a disappointing outcome for the monetary policy makers at the Australian Reserve, which has led markets to abandon hopes of any interest rate cuts this year.

Opinions and Analysis

Madeline Dunk, an economic expert at ANZ Bank, said: "Consumer price data is higher than we had expected, higher than what the market had anticipated, and higher than what the Australian Reserve had forecasted."

Dunk added: "The 1% rise in the first quarter will likely concern the Australian Reserve, as it had been leaning towards cutting interest rates in the country next November."

Dunk further explained: "I believe the Australian Reserve would like to see a slowdown in the numbers for services and goods in the second quarter of this year; if that does not happen, we expect a postponement of Australian interest rate cuts until next year."

James Kniveton, the head of foreign exchange trading for corporates at Convera, stated: "The renewal of inflationary pressures could eliminate any chance of the Australian Reserve cutting interest rates this year."

Australian Interest Rates

The markets currently almost rule out any bet on Australian interest rate cuts this year. The total expected easing from the Australian Reserve this year has been reduced to 3 basis points, down from 17 basis points previously.

Westpac bank today postponed the expected timing of the first Australian interest rate cut from September to November, due to slow progress in combating inflation and a job market that is still healthy.

Japanese Yen

The image above illustrates the severe losses of the Japanese yen last week against the seven major currencies in the foreign exchange market, due to the Bank of Japan.

The yen recorded the lowest levels:

• 34-year low against the US dollar at 158.44 yen.
• 16-year low against the euro at 169.39 yen.
• 16-year low against the British pound at 197.92 yen.
• All-time low against the Swiss franc at 173.22 yen.
• 17-year low against the Canadian dollar at 115.77 yen.
• 17-year low against the New Zealand dollar at 94.06 yen.
• 11-year low against the Australian dollar at 103.64 yen.

Bank of Japan

In line with expectations, the Bank of Japan last week decided not to make any changes to its current monetary policy tools, keeping interest rates unchanged at a range of 0.1%.

In its March meeting, the Bank of Japan decided to raise the short-term interest rate by about 20 basis points to a range of 0.10%, the first Japanese interest rate hike since 2007.

In its monetary policy statement update, the Bank of Japan removed the mention of monthly purchases of Japanese government bonds worth 6 trillion yen, stating it would continue bond purchases in line with the March decision.

The Bank of Japan has warned of the risks of rising prices in the country due to foreign exchange rates, global commodity prices, and import prices.

In its quarterly economic outlook report, the Bank of Japan said on Friday: "Financial movements and the foreign exchange market should be closely monitored to understand their impact on the Japanese economy and prices."

The Bank added: "The Japanese economy will continue to grow above its potential growth rate with a gradually increasing virtuous cycle from income to expenditure."

The Bank of Japan noted: "Inflation expectations are moderately high. The Japanese economy is expected to grow above its potential with a positive economic cycle strengthening gradually."

The Bank also stated: "The central bank can adjust the degree of monetary easing if the inflation trend increases. The bank sees the yield on Japanese government bonds for 10 years recovering from its losses."

The Bank of Japan raised the average CPI forecast for fiscal year 2024 to 2.8% from 2.4% in January. It expects the core CPI to reach 1.9% for the fiscal year 2024, unchanged from January.

The average GDP forecast by the Bank of Japan's board of directors for fiscal year 2024 is 0.8%, compared to 1.2% in January.

Kazuo Ueda, Governor of the Bank of Japan, said: "The central bank will adjust its monetary easing policy if core inflation rises." Ueda added: "The central bank is monitoring financial movements and the foreign exchange market and their impact on the economy and price levels."

Ueda clarified: "If the weakening of the Japanese yen exchange rate affects core inflation, it could influence upcoming policy decisions. So far, the weakness of the yen has not had a significant impact on inflation."

Last week's data showed that core inflation in Tokyo fell to 1.6% in April, from 2.4% the previous month, below economists' average expectations of a 2.2% rise.

This data reduces the inflationary pressures on the monetary policy makers at the Bank of Japan, and strengthens the hypothesis of maintaining the current low interest rates in Japan for the longest possible period.

Shunichi Suzuki, the Japanese Finance Minister, said: "The country is concerned about the negative effects of the yen's weakness and is closely monitoring currency movements, ready to take full steps in response."

Yoshi Masa Hayashi, Chief Cabinet Secretary, said: "The Japanese authorities are prepared to take necessary actions as needed."

Hayashi in a press conference stated: "It is important for currency prices to move stably in a way that reflects the fundamentals. Excessive volatility is undesirable." He declined to comment on recent yen movements or the possibility of market intervention."

Takao Ouchi, the executive director of the ruling party in Japan, mentioned: "The party has not yet had active discussions about yen levels worthy of market intervention, although the currency's drop to around 160 against the dollar might prompt policymakers to act."