AUD/JPY rises above 94.00 despite increased risk aversion

AUD/JPY may lose ground as safe-haven demand rises amid escalating Middle East tensions.
President Trump demanded Iran’s “unconditional surrender.”
Japanese PM Ishiba stated that the cash handout is the quickest way to support low-income households.

Akhtar Faruqui FXStreet

AUD/JPY holds gains after registering nearly 0.50% losses in the previous session, trading around 94.20 during the European hours on Wednesday. However, the upside of the currency cross could be limited due to heightened safe-haven demand, driven by escalating Middle East tensions. This increased risk aversion puts downward pressure on the risk-sensitive Australian Dollar (AUD) while contributing support for the Japanese Yen (JPY).

US President Donald Trump posted on his social media platform on Tuesday, calling for Iran’s “unconditional surrender.” The US military is deploying more fighter aircraft to strengthen its presence, three officials told. Meanwhile, Israel may intensify its attacks on Iran, while the United States (US) is considering expanding its role in the conflict.

President Trump said that he wants a permanent end to Iran's route to nuclear weapons following his early departure from the G-7 meeting in Canada. However, Tehran has reportedly urged several countries, including Oman, Qatar, and Saudi Arabia, to urge US President Donald Trump to declare an immediate ceasefire.

Traders await Australia’s upcoming labor data, including Employment Change and Unemployment Rate, scheduled to be released later this week. The jobs figures will likely offer fresh impetus to the domestic economy and shape expectations for the Reserve Bank of Australia’s (RBA) policy outlook.

On Wednesday, Japanese Prime Minister Shigeru Ishiba said that the cash handout is the quickest and most effective way to help low-income households cope with high prices. Ishiba said that he had agreed with President Trump to continue ministerial-level tariff talks and will continue to work intensely to achieve a trade deal with the US.

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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