AUD/JPY holds gains near 94.50 due to potential delay in the BoJ’s rate hikes
- AUD/JPY rises as the Japanese Yen struggles amid rising expectations of delaying the interest rate hike by the BoJ.
- Japan faces threats of economic fallout as the US has imposed a 25% tariff on Japanese vehicles.
- Australia’s Services PMI improved to 51.3 in June from 50.6 prior, while the Composite PMI increased to 51.2 from 50.5.
AUD/JPY extends its gains for the second consecutive session, trading around 94.50 during the early European hours on Monday. The currency cross depreciates as the Japanese Yen (JPY) loses ground amid rising expectations of delaying the interest rate hike by the Bank of Japan (BoJ). Traders anticipate the timing of the BoJ’s next rate hike in Q1 2026. Governor Kazuo Ueda reiterated a data-driven policy approach, leaving the door open for further rate hikes if inflationary pressures persist.
Additionally, the Japanese Yen (JPY) faces challenges amid concerns over potential economic fallout as the United States (US) has imposed a 25% tariff on Japanese vehicles. Moreover, the US is also planning a 24% reciprocal tariff on other Japanese imports. These measures are part of a broader trade dispute between the two countries, with ongoing negotiations to potentially avert the tariffs. The reciprocal tariffs have been temporarily suspended until July 9, per Reuters.
On the data front, the Jibun Bank Japan Composite PMI improved to 51.4 in June from a 50.2 prior, marking the third straight month of growth and the fastest pace since February. Manufacturing PMI rose to 50.4 in June from the previous reading of 49.4 and above the market forecast of 49.5. Meanwhile, Services PMI increased to 51.5 from 51.0 prior.
In Australia, S&P Global reported that the preliminary Australia Manufacturing Purchasing Managers Index (PMI) remained consistent at a 51.0 reading in June. Meanwhile, the Services PMI edged higher to 51.3 from the previous reading of 50.6, while the Composite PMI improved to 51.2 in June from 50.5 prior.
The upside of the AUD/JPY cross could be restrained as the Australian Dollar (AUD) struggles amid risk aversion, driven by the escalating Middle East tension. The US had attacked Iran's three nuclear facilities, including Fordow, Natanz, and Isfahan, in strikes overnight, in coordination with an Israeli assault. In response, the Iranian parliament approved a measure to close the strait.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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