- The AUD/JPY pair declines as the Aussie weakens, influenced by growing expectations of a rate reduction by the RBA in May.
- The Australian Dollar could potentially receive support from indications of de-escalation in US-China relations.
- The Yen loses ground as demand for safe-haven assets diminishes amid improving global trade confidence.
The AUD/JPY pair interrupts its three-day advance, hovering around 91.80 in early European trading on Monday. The cross-currency pair is losing momentum as the Australian Dollar (AUD) faces headwinds, spurred by increasing anticipation that the Reserve Bank of Australia (RBA) will implement a 25-basis-point cut to interest rates in May. Heightened economic ambiguity and escalating worries about the global trade prospects are contributing to the downward pressure.
On Thursday, Westpac projected that the RBA would reduce rates by 25 basis points at their meeting on May 20. The RBA’s reliance on incoming data makes it difficult to reliably forecast their decisions beyond the immediate upcoming meeting.
The AUD/JPY pair might gain traction if the Australian Dollar benefits from emerging signs of reduced friction between the US and China, a significant trade partner of Australia. On Friday, China exempted certain imports from the US from its 125% tariffs, raising hopes that the protracted trade dispute between the world’s two largest economies may be nearing a resolution.
However, this optimism was somewhat subdued when a Chinese embassy representative informed Reuters that “China and the US are not engaged in any consultation or negotiation regarding tariffs,” while urging Washington to “refrain from creating uncertainty.”
Concurrently, the downside for the AUD/JPY pair might be limited as the Japanese Yen (JPY) softens amidst a more positive outlook for global trade. The prior week, Japanese Finance Minister Katsunobu Kato and US Treasury Secretary Scott Bessent held a private meeting during the IMF and World Bank spring sessions in Washington. While Kato shared limited specifics, he stressed that Japan and the US would maintain close and productive dialogue on exchange rates, implying that currency matters could be part of broader trade discussions.
Risk sentiment FAQs
Within financial terminology, the commonly used phrases “risk-on” and “risk-off” describe the degree of risk investors are prepared to accept during a given period. In a “risk-on” environment, investors are optimistic about future prospects and more inclined to invest in higher-risk assets. Conversely, in a “risk-off” environment, investors tend to prioritize safety due to concerns about the future, leading them to favor less risky assets that offer more predictable returns, even if they are relatively modest.
Typically, in “risk-on” periods, equity markets tend to rise, and most commodities, excluding Gold, also increase in value, benefiting from a positive growth outlook. The currencies of countries that heavily export commodities strengthen due to increased demand, and Cryptocurrencies also experience gains. In a “risk-off” market, Bonds, particularly major government Bonds, increase in value, Gold performs well, and safe-haven currencies like the Japanese Yen, Swiss Franc, and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD), and less prominent currencies like the Ruble (RUB) and the South African Rand (ZAR) generally appreciate in “risk-on” markets. This is because the economies of these countries are heavily dependent on commodity exports for growth, and commodity prices tend to rise during risk-on periods. This occurs because investors anticipate greater demand for raw materials in the future due to increased economic activity.
The primary currencies that tend to rise during “risk-off” periods are the US Dollar (USD), the Japanese Yen (JPY), and the Swiss Franc (CHF). The US Dollar benefits from its status as the world’s reserve currency and because investors purchase US government debt in times of crisis, viewing it as safe due to the low likelihood of default by the world’s largest economy. The Yen strengthens due to increased demand for Japanese government bonds, a large proportion of which are held by domestic investors who are unlikely to sell them, even during a crisis. The Swiss Franc benefits from strict Swiss banking laws that offer investors enhanced capital protection.
