AUD/JPY trades above 111.50 after paring recent losses

AUD/JPY recovers its daily losses after opening at a gap down.
The Australian Dollar weakens as Middle East tensions continue to weigh on overall market sentiment.
The Japanese Yen may strengthen as rising oil prices fuel inflation concerns and reinforce the BoJ’s hawkish stance.

AUD/JPY remains in the negative territory, trading around 111.70 during the Asian hours on Monday. The currency cross struggles as the Australian Dollar (AUD) comes under pressure from escalating geopolitical tensions that continue to weigh on overall market sentiment.

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Risk aversion strengthened as tensions in the Middle East persisted after US President Donald Trump issued Iran a 48-hour ultimatum to reopen the Strait of Hormuz to shipping or face potential destruction of its energy infrastructure.

In response, Iran’s Islamic Revolutionary Guard Corps (IRGC) warned that it would fully shut the strait if the US follows through on its threats. At the same time, the Jerusalem Post reported that Washington is considering a possible ground operation to seize Iran’s Kharg Island, a key oil export hub.

Investors are now focused on Wednesday’s Australian inflation report, where headline inflation is expected to remain steady at 3.8% YoY in February. The data comes after the Reserve Bank of Australia (RBA) delivered a narrowly split decision to raise the cash rate to 4.1%, marking back-to-back hikes for the first time since mid-2023 and reversing part of last year’s easing cycle, as policymakers attempt to rein in persistent inflationary pressures.

The AUD/JPY cross could extend its downside as the Japanese Yen (JPY) may strengthen, supported by rising oil prices that continue to fuel inflation concerns and reinforce a hawkish stance among major central banks. While the Bank of Japan kept interest rates unchanged last week, it signaled readiness to tighten policy further if needed.

Moreover, the JPY may also gain traction against its peers on growing speculation that Japanese authorities could step into the forex market to curb excessive currency moves.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

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.

What are the key assets to track to understand risk sentiment dynamics?

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.

Which currencies strengthen when sentiment is "risk-on"?

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.

Which currencies strengthen when sentiment is "risk-off"?

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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