Key Moments
- AUD/JPY traded near 113.40 during European hours on Wednesday, marking its third consecutive day of gains.
- Renewed expectations for a second round of US-Iran talks boosted risk sentiment and supported the Australian Dollar.
- The Japanese Yen weakened amid higher oil prices and concerns about Japan’s reliance on Middle East energy, though potential intervention talk provided a partial counterbalance.
Cross Advances as Risk Appetite Lifts the Australian Dollar
The AUD/JPY pair remained firm for a third straight session, changing hands around 113.40 during European trading on Wednesday. The move reflected steady demand for the Australian Dollar (AUD), with sentiment underpinned by optimism around a possible second round of talks between the United States and Iran.
Improved risk appetite helped keep AUD supported against the Japanese Yen (JPY), reinforcing the broader risk-on tone in currency markets.
Trump Comments Shape Expectations Around US-Iran Ceasefire and Negotiations
US President Donald Trump stated that he is not looking to prolong the ceasefire and does not consider an extension necessary. “I think you’re going to be watching an amazing two days ahead. I really do,” Trump said in an ABC News interview on Wednesday. He had earlier indicated that negotiations could resume this week, while also rejecting the idea of a 20-year halt to Iran’s nuclear enrichment program.
These remarks contributed to reshaping investor expectations around the timing and scope of any renewed US-Iran discussions, feeding into market risk sentiment and supporting AUD/JPY.
RBA Flags Stagflation Risk Amid Energy Shock and Sticky Inflation
Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser warned on Tuesday that the coming months will be difficult for Australia as it navigates an energy shock tied to Middle East tensions and elevated inflation. Speaking at a fireside chat, Hauser noted that the economy is finding it hard to absorb the impact due to persistent price pressures and ongoing supply constraints.
He cautioned that these dynamics heighten the risk of a scenario resembling stagflation, where growth slows while inflation remains high.
JPY Pressured by Oil Dynamics and Middle East Tensions
AUD/JPY also drew support from softness in the Japanese Yen. The JPY struggled as higher oil prices underscored Japan’s significant dependence on energy imports from the Middle East. Rising crude prices were linked to uncertainty over flows through the Strait of Hormuz, after the US military imposed a blockade that tightened supply conditions and raised questions about the trajectory of further talks with Iran.
| Driver | Impact on AUD | Impact on JPY |
|---|---|---|
| Prospects for US-Iran talks | Supports risk sentiment and AUD | Reduces safe-haven demand for JPY |
| Rising oil prices | Linked to broader risk and commodity dynamics | Highlights Japan’s reliance on Middle East energy, weighing on JPY |
| Middle East conflict risks | Complicates Australian outlook via energy and inflation | Raises concern over Japan’s growth outlook |
Nonetheless, speculation that Japanese authorities could step in to support the currency offered some potential cushion for the Yen.
BoJ Stresses Vigilance on Middle East Fallout
Bank of Japan (BoJ) Governor Kazuo Ueda emphasized that policymakers must closely monitor the economic repercussions of the Middle East conflict. He warned that further increases in oil prices could drag on Japan’s growth prospects, underscoring the vulnerability of the country’s outlook to energy market disruptions.
Understanding Risk Sentiment in Markets
The article also provided a brief primer on how “risk-on” and “risk-off” conditions influence asset prices and currencies.
Definitions: Risk-On vs Risk-Off
“Risk-on” and “risk-off” describe how willing investors are to take on risk during a given period. In a “risk-on” environment, investors are more confident about the future and more inclined to allocate capital to higher-risk assets. In a “risk-off” setting, caution prevails, and investors typically favor safer holdings that offer more predictable returns, even if they are lower.
Assets and Currencies in Different Risk Regimes
During “risk-on” phases, equity markets usually advance, and most commodities other than Gold tend to appreciate, reflecting optimism about growth. Currencies of commodity-exporting economies often strengthen, and Cryptocurrencies can gain as well.
In “risk-off” conditions, government Bonds – particularly those of major economies – typically rise, Gold tends to perform well, and safe-haven currencies such as the Japanese Yen, Swiss Franc, and US Dollar usually benefit.
Risk-On Currencies
Among currencies, the Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD), and some smaller foreign exchange markets such as the Ruble (RUB) and South African Rand (ZAR) generally appreciate when markets are “risk-on”. These economies are closely tied to commodity exports, which tend to gain when investors anticipate stronger future demand for raw materials due to increased economic activity.
Risk-Off Currencies
In contrast, the US Dollar (USD), Japanese Yen (JPY), and Swiss Franc (CHF) are typically favored when sentiment turns “risk-off”. The US Dollar benefits from its role as the world’s reserve currency and from demand for US government debt, which is regarded as secure. Demand for the Yen rises partly because a significant share of Japanese government bonds is held domestically, and domestic investors are unlikely to sell heavily in times of stress. The Swiss Franc is supported by Switzerland’s banking framework, which offers strong capital protection.
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