AUD/JPY rises to near 110.00 as Middle East tensions de-escalate

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AUD/JPY gains ground for the second consecutive trading day, trading around 110.10 during the European hours on Wednesday. The currency cross appreciates as the risk-sensitive Australian Dollar (AUD) receives support amid de-escalating Middle East tensions.

AUD/JPY gains as safe-haven demand increases on rising hopes for Middle East peace truce.
Trump signaled a possible US exit from Iran within weeks, while Pezeshkian showed openness to easing regional tensions.
Japan’s Tankan Manufacturing Index rose to 17 in Q1, supporting BoJ’s gradual rate hike stance.

US President Donald Trump indicated that the United States (US) would be “leaving very soon” from the Iran war, noting that a withdrawal could take place within two to three weeks. Trump further emphasized that a formal agreement with Tehran is not a necessary condition for ending hostilities. Iranian President Masoud Pezeshkian expressed a willingness to de-escalate regional tensions if specific guarantees are met.

Elevated energy prices tied to the Middle East conflict continue to complicate the Reserve Bank of Australia’s (RBA) policy outlook, with analysts warning they may keep inflation higher for longer and increase pressure for further rate hikes in Australia. Markets are currently pricing a 64% probability of an interest rate increase to 4.35% at the next RBA Board meeting. As of March 31, the ASX 30 Day Interbank Cash Rate Futures May 2026 contract was trading at 95.765.

On the data front, China, Australia’s key trading partner, saw its RatingDog Manufacturing Purchasing Managers’ Index (PMI) ease to 50.8 in March from 52.1 in February, falling short of expectations of 51.6 amid rising energy costs. Meanwhile, in Australia, the RBA Commodity Index SDR climbed 12.8% YoY in March, up from a revised 4.9% gain in the previous month, marking the strongest increase since January 2023.

In Japan, Tankan Large Manufacturing Index rose for a fourth consecutive quarter to 17 in Q1 2026 from a revised 16, beating expectations and supporting the Bank of Japan’s (BoJ) stance of gradual rate hikes, potentially supporting the Japanese Yen (JPY) against its major peers.

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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