AUD/JPY extends losses to near 97.50 due to hawkish BoJ, rising geopolitical tensions

AUD/JPY loses ground due to hawkish sentiment surrounding the BoJ.
The safe-haven flows amid rising geopolitical tensions provide support for the Japanese Yen.
The downside of the currency cross could be limited due to the risk-on mood, along with the hawkish RBA.

Akhtar Faruqui FXStreet

AUD/JPY depreciates to near 97.50 during the early European hours on Monday. The downside of the AUD/JPY cross is attributed to the improved Japanese Yen (JPY), driven by hawkish sentiment surrounding the Bank of Japan (BoJ) regarding its policy outlook.

Last week’s data showing growth in Japan’s second-quarter GDP supports the potential for an interest rate hike by the BoJ in the near term. On Monday, Japan’s Machinery Orders, a key indicator of capital expenditure, increased by 2.1% month-on-month in June, surpassing the forecasted 1.1% rise. Markets are now anticipating Japanese inflation figures later this week for further insight into the Bank of Japan’s monetary policy direction.

Additionally, the safe-haven flows amid rising geopolitical tensions might have supported the Japanese Yen. Hamas has rejected the terms for a hostage release-ceasefire deal discussed in Doha on Thursday and Friday, according to Reuters citing a local news agency Times of Israel. Additionally, concerns about escalating tensions between Ukraine and Russia were heightened as Ukraine initiated the largest invasion of Russia since World War II.

However, the downside of the AUD/JPY cross could be restrained due to improved risk sentiment, along with the hawkish mood surrounding the Reserve Bank of Australia (RBA) regarding its policy outlook. Investors will be closely watching the RBA Meeting Minutes and the People’s Bank of China’s (PBoC) Interest Rate Decision on Tuesday.

RBA Governor Michele Bullock stated on Friday that the Australian central bank is focused on the potential upside risks to inflation and anticipates no rate cuts in the near term. Bullock emphasized that the RBA board believes it has struck the right balance between controlling inflation and maintaining stability in the current economic climate, according to ABC News.

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.

Author

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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