AUD/JPY: Rally faces policy and risk tests – Rabobank

Rabobank’s Senior FX Strategist Jane Foley highlights that AUD/JPY has surged to its highest level since 1990, supported by Australia’s status as a net energy exporter and speculation about further RBA rate hikes. The bank notes that unchanged expectations for BoJ policy have also underpinned the cross, but warns that prolonged geopolitical tensions, higher volatility and risk-off conditions could trigger sharp pullbacks.

Cross supported by carry and energy story

"Australia’s position as a net energy exporter is supportive for the AUD in the current environment, as is market speculation regarding the prospects of further RBA rate hikes, potentially as soon as next week."

"If the current crisis is prolonged and more central banks turn hawkish on the back of inflation risks, the JPY may benefit from a drop in liquidity and risk appetite as domestic savings return home."

"Now market pricing is indicating that rate hikes for several of those central banks, including the RBA, could be brought forward."

"Despite the support that the AUD may gains from Australia’s energy exports, carry trades can fizzle in higher volatility, risk off environments."

"While the outcome of next week’s policy meetings will set the tone for AUD/JPY near-term, we would be wary of expecting this currency pair to continue its charge higher if tensions are prolonged."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)