Australian Dollar recovers despite Yen gains, Japan vows fiscal prudence

The Australian Dollar (AUD) bounces back strongly against the Japanese Yen (JPY) and flattens at around 109.80 during the European trading session on Monday.

The antipodean recovers sharply even as financial markets doubt that the Reserve Bank of Australia (RBA) will hike interest rates again this year after raising them already four times.

RBA seen on hold amid softness in housing market

Analysts at Commerzbank argue that the latest inflation data underscore why “1.5 additional rate hikes by the RBA – as the market was still expecting yesterday – are likely to be too much.” One day after the Reserve Bank of Australia’s monetary policy meeting, they note that the August CPI figures help explain the shift, even though “there’s no question that inflation is still too high, and it will take a while before it returns to the middle of the target range.”

Commerzbank stresses that “interest rate hikes always take effect with a certain time lag,” and points in particular to signs of strain in the real estate sector. They highlight that “building permits fell again in August by 6.1% compared to the previous month and prices in the largest cities continue to decline,” suggesting that the cumulative impact of past tightening is still working its way through the economy. Against this backdrop, the bank concludes that “the RBA would likely be well advised to wait and see how things develop in the coming months,” rather than pressing ahead with the scale of additional hikes currently embedded in market pricing.

Meanwhile, the Japanese Yen outperforms its major peers as Japan has vowed fiscal discipline. “We will control the annual debt issuance amount appropriately while scrutinising the economy, prices, tax revenues, interest rates, debt-servicing costs, and market developments,” Japan Prime Minister (PM) Sanae Takaichi said. This has improved the safe-haven demand of the Japanese Yen.