AUD/JPY rises on RBA hawkish outlook as Japan intervention risks cap gains

• AUD/JPY trades around 113.70 on Monday, supported by expectations of further rate hikes in Australia.
• Markets expect the Australian policy rate to reach 4.7% by the end of 2026, with no cuts anticipated before 2028.
• Fears of intervention by Japanese authorities continue to limit the pair’s upside potential.

AUD/JPY posts modest gains around 113.70 on Monday, up 0.13% on the day at the time of writing. The Australian Dollar (AUD) remains supported by the hawkish tone adopted by the Reserve Bank of Australia (RBA), while the Japanese Yen (JPY) stays under pressure amid rising Oil prices and concerns over Japan’s economic outlook.

The Australian central bank raised its policy rate to 4.35% last week, returning to its December 2024 peak. This marks the third consecutive rate hike this year as inflation remains elevated in Australia. The RBA noted that geopolitical tensions in the Middle East continue to push energy and commodity prices higher, reinforcing inflationary pressures.

The central bank’s projections now suggest the policy rate could reach 4.7% by the end of the year, with no rate cuts expected until 2028. HSBC also noted that the Australian Dollar has been among the best-performing G10 currencies this quarter, supported both by improving global risk sentiment and the RBA’s more restrictive monetary policy stance.

The Australian Dollar is also benefiting from positive expectations surrounding United States (US) President Donald Trump’s visit to China from May 13 to May 15. Discussions with Chinese President Xi Jinping are expected to focus on several sensitive topics, including Middle East tensions, Taiwan, artificial intelligence and critical minerals. Any signs of easing tensions between Washington and Beijing could further support the Australian currency, given Australia’s heavy reliance on exports to China.

Additionally, the latest Chinese economic data strengthened the positive sentiment around the Aussie. China’s Consumer Price Index (CPI) rose 1.2% YoY in April, above market expectations of 0.8%, while the Producer Price Index (PPI) jumped 2.8%, also beating forecasts.

On the Japanese side, the JPY remains pressured by rising Oil prices. West Texas Intermediate (WTI) trades around $95 after Donald Trump rejected Iran’s demands regarding the Strait of Hormuz. Japan’s dependence on energy imports leaves the Japanese currency particularly vulnerable to higher energy costs.

However, the Japanese Yen’s downside could remain limited due to intervention risks from Japanese authorities. Reports published last week indicated that Tokyo intervened again in the foreign exchange market during Golden Week, for an estimated amount between ¥4 trillion and ¥5 trillion. Japan’s top foreign exchange official, Atsushi Mimura, stated that further interventions remain possible if necessary.