AUD/JPY rises above 105.00 as risk-on sentiment improves

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AUD/JPY gains ground for the third successive session, trading around 105.20 during the European hours on Tuesday. The currency cross reached 105.37, a fresh high since July 2024, during the earlier trading hours.

AUD/JPY gains ground on increased risk appetite amid easing US–Venezuela tensions.
AUD rises as sticky inflation boosts expectations of at least two additional RBA rate hikes.
The Japanese Yen may strengthen as expectations grow for further BoJ rate hikes this year.

The risk-sensitive Australian Dollar (AUD) receives support against the safe-haven currencies including the Japanese Yen (JPY) amid increasing risk-on sentiment, which could be attributed to easing concerns about a broader United States (US)-Venezuela tensions. Traders await Australia's November Consumer Price Index (CPI) release due on Wednesday.

The AUD also finds support following a recent survey of leading economists cited by the Australian Financial Review (AFR), which suggests the Reserve Bank of Australia (RBA) may not be done tightening this cycle. The poll indicates inflation is expected to remain stubbornly elevated over the coming year, fueling expectations of at least two additional rate hikes.

The upside of the AUD/JPY cross could be limited as the Japanese Yen (JPY) could gain ground amid rising odds that the Bank of Japan (BoJ) will continue raising interest rates this year. BoJ Governor Kazuo Ueda said the central bank will adjust interest rates as economic conditions and prices develop in line with its projections. Ueda also said the economy is likely to maintain a virtuous cycle of moderate, simultaneous wage and price increases.

Traders may adopt caution amid fiscal concerns over Prime Minister Sanae Takaichi’s large-scale spending plans to spur growth. Attention also remains on potential currency intervention, as business leaders have urged the government to address the Yen’s weakness.

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.

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