AUD/JPY gains traction above 114.00 as RBA hike bets grow

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The AUD/JPY cross trades in positive territory for the fifth consecutive day around 114.30 during the early European session on Friday. The Australian Dollar (AUD) strengthens against the Japanese Yen (JPY) on a hawkish stance of the Reserve Bank of Australia (RBA).

AUD/JPY extends the rally to near 114.30 in Friday’s early European session.
Markets imply a 65% odds of another quarter-point rise by the RBA in May.
BoJ’s Ueda steered clear of signaling a rate hike was on the cards this month.

The Australian central bank has held the Official Cash Rate (OCR) at 4.10%. Financial markets are now pricing in nearly a 65% probability of another hike at the next policy meeting, which would lift the OCR to 4.35%, according to Reuters.

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.

Meanwhile, Bank of Japan (BoJ) Governor Kazuo Ueda said on Friday that a decision on how soon to raise interest rates must take into account the fact that the nation's real interest rate is low. Ueda further stated that Japan is facing rising inflation from a "negative supply shock," which is more difficult to rein in with monetary policy than inflation driven by strong demand.

Verbal intervention from Japanese authorities might underpin the JPY and cap the upside for the 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.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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.

How does the differential between Japanese and US bond yields impact the Japanese 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.

How does broader risk sentiment impact the Japanese Yen?

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.