AUD/JPY Rises Toward 110 as Middle East Risk Eases

Key Moments

Middle East De-escalation Supports Risk Appetite

AUD/JPY advanced for a second consecutive session, trading near 110.10 during European hours on Wednesday. The cross moved higher as the risk-sensitive Australian Dollar found support amid signs of easing geopolitical tensions in the Middle East.

US President Donald Trump stated that the United States would be “leaving very soon” from the Iran war, suggesting a withdrawal could occur within the next two to three weeks. He also stressed that a formal agreement with Tehran is not a prerequisite for ending the conflict. At the same time, Iranian President Masoud Pezeshkian indicated a readiness to reduce regional frictions if certain conditions and guarantees are fulfilled.

These developments bolstered broader risk sentiment, lending support to pro-cyclical currencies such as the Australian Dollar against traditional safe havens like the Japanese Yen.

RBA Outlook Complicated by Energy Prices

Despite the improving geopolitical backdrop, elevated energy prices linked to the Middle East conflict continue to cloud the Reserve Bank of Australia’s policy path. Analysts caution that higher energy costs may sustain inflationary pressures for longer, potentially reinforcing the case for further monetary tightening in Australia.

Market pricing currently reflects a 64% probability that the RBA will raise its policy rate to 4.35% at the next Board meeting. As of March 31, the ASX 30 Day Interbank Cash Rate Futures May 2026 contract was quoted at 95.765, underscoring expectations for a tighter policy stance.

China and Australian Data Paint Mixed Picture

On the macro data front, conditions in China, a crucial export market for Australia, softened. The RatingDog Manufacturing Purchasing Managers’ Index dipped to 50.8 in March from 52.1 in February, undershooting expectations of 51.6. The moderation occurred against a backdrop of rising energy costs.

Domestically, Australia’s export sector showed resilience through commodity prices. The RBA Commodity Index SDR surged 12.8% year-on-year in March, up from a revised 4.9% increase in the prior month. This represented the strongest yearly gain since January 2023, signaling robust pricing support for Australia’s key export products.

Stronger Tankan Backs Gradual BoJ Tightening

In Japan, business sentiment in the manufacturing sector continued to improve. The Tankan Large Manufacturing Index increased to 17 in the first quarter of 2026, up from a revised 16, marking the fourth straight quarterly rise. The outcome exceeded expectations and aligns with the Bank of Japan’s preference for a gradual normalization of interest rates.

The firmer Tankan data provides fundamental support for the Japanese Yen against major counterparts, partially offsetting the current risk-driven demand for the Australian Dollar in the AUD/JPY pair.

Risk Sentiment: Common Market Dynamics

What do “risk-on” and “risk-off” mean?

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.

Key assets that reflect global risk mood

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.

Currencies that usually gain in “risk-on” environments

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.

Currencies that typically strengthen in “risk-off” episodes

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.