AUD/JPY Extends Gains as Markets Price Higher RBA Rates

Key Moments

AUD Advances as RBA Hawkish Tone Lifts Rate Expectations

The AUD/JPY cross continues to climb for a fifth consecutive session, trading near 114.30 in early European dealings on Friday. The Australian Dollar is firm against the Japanese Yen as investors react to a more hawkish tone from the Reserve Bank of Australia (RBA).

The RBA has kept its Official Cash Rate (OCR) at 4.10%. However, futures markets are now assigning nearly a 65% probability that policymakers will raise the OCR to 4.35% at their next meeting, according to Reuters. This repricing of the policy outlook is providing support to the Aussie.

RBA Governor Andrew Hauser said on Monday that he was not confident that interest rates were at the right level to tame inflation, adding that interest rates would need to go to the level that brings inflation back to the target band of 2%-3% from its headline rate of 3.7% in February. Hawkish remarks from RBA policymakers provide some support to the Aussie.

Contrasting Central Bank Signals From Japan

On the Japanese side, policy communications are more nuanced. Bank of Japan (BoJ) Governor Kazuo Ueda stated on Friday that any decision on when to raise interest rates must consider that the nation’s real interest rate remains low. He also noted that Japan is confronting higher inflation stemming from a “negative supply shock,” which he described as more challenging to control through monetary policy than inflation driven by robust demand.

This backdrop of low real rates and supply-driven inflation shapes expectations for the BoJ’s pace of normalization and influences demand for the Yen versus higher-yielding currencies such as the Australian Dollar.

Authorities Signal Possible FX Action to Support JPY

Japanese policymakers have signaled that they are closely monitoring currency moves and could step in if volatility intensifies. Verbal intervention from Japanese authorities might underpin the JPY and cap further gains in the AUD/JPY cross.

Japan’s Finance Minister Satsuki Katayama said on Thursday that she’s held close discussions on foreign exchange issues with US Treasury Secretary Scott Bessent and that authorities are prepared for “bold” action if needed. She also told the G7 to closely watch forex moves.

Key Policy Levels and Market Pricing

Japanese Yen: Drivers and Character

The Japanese Yen (JPY) ranks among the most actively traded global currencies. Its value is influenced by the overall performance of the Japanese economy and, more specifically, by the policy stance of the Bank of Japan, the interest rate gap between Japanese and US bonds, and broader shifts in market risk appetite, among other variables.

Role of the Bank of Japan in Currency Dynamics

One of the Bank of Japan’s mandates is currency control, making its actions central to the Yen’s behavior. The BoJ has at times intervened directly in foreign exchange markets, typically with the aim of weakening the Yen, although it avoids frequent intervention due to political sensitivities with major trading partners.

The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

Impact of Yield Differentials and Risk Sentiment

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

The Japanese Yen is often viewed as a safe-haven currency. During episodes of market stress, investors tend to allocate more capital to the Yen because of its perceived stability and reliability. As a result, periods of turbulence are typically associated with Yen strength relative to currencies considered riskier.