The AUD/JPY pair rose for the third straight session, trading around 105.20 during European hours on Tuesday. The currency pair reached 105.37, a new high since July 2024, during the previous trading hours.
The risk-sensitive Australian dollar is receiving support against safe-haven currencies including the Japanese Yen (JPY) amid rising risk sentiment, which can be attributed to easing concerns over broader tensions between the US and Venezuela. Traders await the release of the Australian November Consumer Price Index (CPI) scheduled for Wednesday.
The Australian dollar is also finding support after a recent poll of leading economists cited by the Australian Financial Review (AFR), which suggests the Reserve Bank of Australia (RBA) may not be finished tightening this cycle. The poll indicates that inflation is expected to remain stubbornly high over the next year, increasing expectations of raising interest rates at least two additional times.
The upside for the AUD/JPY pair may be limited as the Japanese Yen (JPY) could gain strength amid increasing odds that the Bank of Japan (BoJ) will continue raising interest rates this year. Bank of Japan Governor Kazuo Ueda said the central bank will adjust interest rates as economic conditions develop and prices in line with its expectations. Ueda also said the economy is likely to maintain a virtuous cycle of moderate, simultaneous increases in wages and prices.
Traders may be cautious amid financial concerns over Prime Minister Sanae Takaishi’s wide-ranging spending plans to stimulate growth. Attention also remains focused on potential currency intervention, with business leaders urging the government to address the weak yen.
Frequently asked questions about risk sentiment
In the world of financial terminology, the two widely used terms “risk appetite” and “risk aversion” refer to the level of risk that investors are willing to take over the indicated period. In a “risk on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk off” market, investors begin to “play safe” because they are concerned about the future, and thus buy assets that are less risky and more guaranteed to generate a return, even if it is relatively modest.
Typically, during periods of “risk on”, stock markets rise, and most commodities – with the exception of gold – will also rise in value because they benefit from positive growth expectations. The currencies of countries exporting heavy goods are strengthening due to increased demand, and cryptocurrencies are rising. In a “risk off” market, bonds – especially major government bonds – rise, gold shines, and safe-haven currencies like the Japanese yen, Swiss franc and US dollar all benefit.
The Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD) and minor foreign currencies such as the Ruble (RUB) and South African Rand (ZAR) tend to appreciate in ‘risk’ markets. This is because the economies of these currencies rely heavily on commodity exports for growth, and commodities tend to rise in price during periods of risk. This is because investors expect increased demand for raw materials in the future due to increased economic activity.
The major 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, because it is the world’s reserve currency, and because in times of crises investors buy US government debt, which is considered safe because the world’s largest economy is unlikely to default. The reason for the yen is the increased demand for Japanese government bonds, because a high percentage of them are held by domestic investors who are unlikely to get rid of them – even in a crisis. The Swiss franc, because strict Swiss banking laws provide investors with enhanced capital protection.
