AUD/JPY Under Pressure as Safe-Haven Flows Lift Yen

Key Moments

Risk-Off Flows Support the Yen

The AUD/JPY cross is trading lower around 108.90 during early European dealings on Friday, with the pair remaining in negative territory. The Japanese Yen (JPY) is strengthening against the Australian Dollar (AUD) as investors move toward safe-haven assets and respond to signals of potential interest rate hikes from the Bank of Japan (BoJ).

Concerns about tighter oversight of the Artificial Intelligence (AI) sector, especially regarding data center construction, have unsettled global markets this week. This deterioration in risk sentiment is prompting a flight to safety that benefits the Yen and weighs on AUD/JPY.

BoJ Minutes Reinforce Tightening Expectations

Hawkish signals from the BoJ are adding to the JPY’s upside. Minutes from the central bank’s September meeting, released on Thursday, showed that most policymakers viewed additional rate hikes as appropriate as underlying inflation edged closer to the BoJ’s 2% target.

One board member suggested that there could be scope to speed up the pace of rate increases as the bank evaluates the impact of developments in the Middle East, rising demand associated with AI, and movements in foreign exchange markets.

Deutsche Bank View: Gradual but Clear Tightening Bias

Analysts at Deutsche Bank observe that the minutes from the BoJ’s September meeting “reinforced the case for further policy tightening.” They note that policymakers “generally agreed that interest rates should continue to rise,” with one member “highlighting the possibility of a faster pace of hikes.” At the same time, Deutsche Bank points out that another policymaker “noted that while there was no need for immediate action, the BoJ should continue to calibrate policy carefully to prevent excessive and persistent inflationary pressures,” underscoring a cautious but clearly tightening bias within the committee.

Technical Picture: Bearish Bias Below Key Moving Averages

On the daily chart, AUD/JPY maintains a negative short-term structure as the spot price remains firmly capped below the 20-day simple moving average (SMA) that forms part of the Bollinger Bands, as well as below the 100-day SMA. The pair is testing the lower boundary of its recent trading range, with the lower Bollinger Band now acting as the nearest resistance zone. The Relative Strength Index (RSI) stands at 36.91, just above oversold levels, indicating ongoing downside pressure rather than signaling a clear bullish reversal.

Key Levels to Watch

Immediate resistance is located at the lower limit of the Bollinger Band at 109.15. A move higher from there would bring the 110.00 psychological barrier into focus, followed by the 20-day SMA near 110.40, where stronger selling interest could reemerge. If price action manages to hold above that region, the door would open toward the upper Bollinger Band at 111.65 and the 100-day SMA at 111.80.

On the downside, the October 15 low at 108.64 serves as the first notable support area. A break below that level would expose the February 13 low at 107.70, followed by the January 26 low at 106.08.

Japanese Yen: Background and Market Drivers

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main 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.

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 seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.