AUD/JPY trims losses near 112.50 as RBA hikes official cash rate to 4.35%

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AUD/JPY recovers modestly to around 112.65 in Tuesday’s early European session.
RBA lifted the Official Cash Rate to 4.35% from 4.1% at its May meeting on Tuesday.
Traders remain on edge over the potential for Japanese authorities to step back into the market after last week’s intervention.

The AUD/JPY cross pares losses near 112.65 during the early European trading hours on Tuesday. The Australian Dollar (AUD) edges slightly higher after the Reserve Bank of Australia (RBA) interest rate decision. Traders await Governor Michele Bullock’s press conference at 04:30 GMT for fresh impetus.

As widely expected, the Australian central bank on Tuesday decided to raise the Official Cash Rate (OCR) by 25 basis points (bps) to 4.35% from 4.10% after concluding its May monetary policy meeting. According to the RBA Monetary Policy Statement, the central bank noted a significant increase in uncertainty over the domestic economic outlook and inflation.

The fallout from the Iran war will slash half a percentage point off economic growth in 2026 against the pre-conflict forecasts in February, as annual growth halves to 1.3% this year.

On the JPY’s front, markets remain on high alert following suspected interventions by Japanese authorities. Japanese Finance Minister Satsuki Katayama said Japan can take action against speculative foreign-exchange movements.

There was no official confirmation, but there were plenty of unofficial signals - including a “final warning” from a top official: the Ministry of Finance (MoF) and the Bank of Japan (BoJ) intervened in the foreign exchange market on Friday to strengthen the Japanese yen. The big question now is: How long will the JPY’s strength last?” said Commerzbank’s Thu Lan Nguyen.

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.