AUD/JPY remains subdued near 112.50 due to risk-off mood

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AUD/JPY edges lower after four days of losses, trading around 112.50 during the European hours on Friday. The currency cross remains subdued as the Australian Dollar (AUD) holds losses following the release of Chinese Consumer Price Index (CPI) data for March.

AUD/JPY remains subdued as China’s CPI rose 0.9% YoY in March, below 1.3% prior and missing the 1.2% forecast.
AUD also weakened as risk aversion rose amid persistent uncertainty over the fragile US–Iran ceasefire.
Markets price in a possible April BoJ rate hike amid rising inflation risks from higher oil prices.

China’s Consumer Price Index rose 0.9% YoY in March, down from 1.3% in February and below the 1.2% consensus. On a monthly basis, CPI fell 0.7% after a 1.0% increase previously. Meanwhile, Producer Price Index rose 0.5% YoY, rebounding from a 0.9% decline and marking its first increase since September 2022, supported partly by higher energy costs amid disruptions in the Strait of Hormuz.

The Australian Dollar (AUD) faced challenges due to renewed risk aversion driven by ongoing uncertainty surrounding the fragile US–Iran ceasefire. Expected diplomatic talks between the US and Iran in Islamabad this weekend remain uncertain, with no official confirmation of delegates’ arrival on Friday.

The Japanese Yen (JPY) may strengthen against major peers as markets price in a potential April rate hike by the Bank of Japan (BoJ) amid oil-driven inflation risks. Japan’s 10-year government bond yield rose near 2.4% on Friday, close to its highest level since 1998.

Japanese Prime Minister Sanae Takaichi said the government is considering releasing about 20 days’ worth of additional oil reserves from early May to stabilize domestic supplies amid ongoing shipping disruptions in the Strait of Hormuz.

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.