Currency markets were shaken this week after Japan stepped in to support the yen, a move that sent the US dollar lower and gave the Australian and New Zealand dollars a boost. The Aussie and kiwi both touched multi-week highs against the greenback, even as investors cooled on the prospect of near-term interest rate hikes from the Reserve Bank of Australia (RBA).
What happened in the currency markets?
Japan's intervention in the foreign exchange market—its first in months—was aimed at stemming the yen's relentless slide. The action weighed on the US dollar, which typically moves inversely to the yen. As the dollar weakened, commodity-linked currencies like the Australian and New Zealand dollars benefited.
The Aussie dollar hovered near $0.7024 after briefly hitting a six-week high around $0.7033. The kiwi sat near $0.5870 after touching a two-month top around $0.5882. Both currencies, however, fell against the yen itself: the AUD/JPY pair slid as much as 2.7% to 110.89 before rebounding, still well below a recent peak of 114.66.
This divergence highlights how currency moves are rarely uniform. While the Aussie and kiwi gained against the US dollar, they lost ground against the yen, reflecting the direct impact of Japan's intervention.
Why does Japan's yen intervention matter?
Japan's move is a reminder that central banks can and do act to influence exchange rates, especially when they view moves as excessive or destabilising. The yen had been under heavy pressure as the Bank of Japan (BOJ) kept interest rates ultra-low while other central banks, including the US Federal Reserve, raised rates. That gap made the yen an attractive funding currency for carry trades, where investors borrow in yen to buy higher-yielding assets elsewhere.
Intervention, which involves selling US dollars or other currencies to buy yen, can provide a short-term jolt but often has limited long-term impact unless backed by policy changes. Traders are now watching for any signals from the BOJ about future rate moves. Japan's bond yields have been rising as markets anticipate a possible shift, and the intervention adds another layer of uncertainty.
For a deeper look at how Japan has handled yen weakness, see our earlier coverage of Japan's intervention ahead of the BOJ decision.
What about the RBA and rate hike expectations?
While the yen jolt lifted the Aussie, traders were simultaneously trimming their bets on near-term RBA rate hikes. The RBA has held its cash rate steady for several months, and recent inflation data has been mixed. Markets now see a lower probability of a hike in the coming months, which typically would weigh on a currency. But the weaker US dollar provided enough support to keep the Aussie elevated.
This dynamic shows that currency values are driven by a complex mix of domestic and international factors. For everyday investors, the key takeaway is that exchange rates can move on events far from home, and those moves can affect the value of international investments, travel costs, and the price of imported goods.
What it means for investors
For Australian and New Zealand investors, a stronger local currency can be a double-edged sword. On one hand, it makes overseas travel and imports cheaper. On the other, it can reduce the returns on foreign investments when converted back to local dollars. For example, if you hold US stocks, a stronger Aussie means your US-dollar gains are worth less in Australian dollar terms.
The yen intervention also has broader implications. It could signal that Japan is willing to defend its currency, which might affect global risk sentiment. Historically, such interventions can lead to short-term volatility in currency markets, and investors should be prepared for swings.
Looking ahead, markets will be watching for any follow-up action from Japan and any hints from the RBA about its policy path. The BOJ has held rates at 1% but has signalled future hikes, which could influence the yen and, in turn, the Aussie and kiwi.
For those with exposure to currencies, it's a reminder to stay diversified and not to overreact to short-term moves. As always, focus on your long-term investment goals rather than trying to time currency fluctuations.
