AUD/JPY falls to near 110.50 following Israeli strikes on Tehran

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AUD/JPY extends its losses for the second successive day, trading around 110.60 during the Asian hours on Tuesday. The currency cross weakens amid heightened risk aversion following a fresh wave of Israeli strikes on Tehran.

AUD/JPY depreciates as risk aversion increases after fresh Israeli strikes hit Tehran.
Japan’s CPI rose 1.3% YoY in February, the lowest since March 2022, below the 2% target.
The S&P Global Flash Composite PMI fell to 47.0 in March from 52.4 in February.

Israel launched its latest attack on Iran despite US President Donald Trump signaling a pause in strikes on energy infrastructure after what he described as productive talks with Tehran. The Israeli Defense Forces (IDF) said operations would continue in line with government directives until further notice.

However, Iran’s Foreign Minister Abbas Araghchi denied any engagement with Washington. Iranian Parliament Speaker Mohammad Bagher Ghalibaf also said on Monday that no negotiations had taken place with the US. Meanwhile, senior military adviser Mohsen Rezaei stated that the conflict would persist until Iran receives full compensation for the damage incurred.

The downside in the AUD/JPY cross may be limited as the Japanese Yen (JPY) remains under pressure following softer inflation data in Japan. The Statistics Bureau of Japan reported that the National Consumer Price Index (CPI) rose 1.3% YoY in February, down from 1.5% previously. This marks the lowest level since March 2022 and falls short of the central bank’s 2% target.

Core inflation, measured by CPI excluding fresh food, eased to 1.6% YoY from 2.0%, coming in below the 1.7% consensus. Meanwhile, “core-core” inflation, which excludes both fresh food and energy, edged down to 2.5% YoY from 2.6%.

In Australia, the S&P Global Flash Composite Purchasing Managers’ Index (PMI) dropped to 47.0 in March from 52.4 in February, signaling a return to contraction after eighteen months as demand conditions weakened. The Services PMI fell to 46.6 from 52.8, marking its first contraction in over two years. Meanwhile, the Manufacturing PMI edged down to 50.1 from 51.0, indicating near stabilization in the sector.

Market focus now shifts to Wednesday’s inflation report, where trimmed mean CPI is expected to hold steady at 3.4% and headline inflation at 3.8%.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

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.

What are the key assets to track to understand risk sentiment dynamics?

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.

Which currencies strengthen when sentiment is "risk-on"?

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.

Which currencies strengthen when sentiment is "risk-off"?

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.