Rabobank’s Senior FX Strategist Jane Foley notes that the Australian Dollar (AUD) has shifted from a top G10 performer to one of the weakest on a 5‑day view as markets reassess Reserve Bank of Australia (RBA) tightening prospects after softer labour data. With the Bank of Japan (BoJ) expected to hike and AUD/JPY losing momentum, Rabobank sees scope for a pullback toward the AUD/JPY112 area over three months.

AUD strength fades as BoJ risk rises

"The AUD has become a familiar fixture at, or close to, the top of the G10 FX performance table this year. This relates to the sharp turnaround in RBA policy expectations relative to the end of last year and the follow-through in the form of the three 25 bps interest rate hikes that have been announced so far in 2026. Now, however, it would appear as if the tide might be turning."

"Currently, the market expects steady policy from the RBA in June, while it is almost fully priced for a 25 bps interest rate hike from the BoJ. Reflecting the softer stance of the AUD, AUD/JPY has lost momentum having reached a recent high earlier this month close to 114.73. For now the 50 day sma at 112.67 is providing near-term support, though a break below could trigger further downside potential for the currency pair."

"Both the RBA and the BoJ are due to hold their respective policy meetings on the same day next month (June 16), and the guidance offered will be key for the outlook for AUD/JPY."

"That said, the paring back of rate hike speculation for some other G10 central banks such as the RBA should improve the relative attraction of the JPY. In our view, there is scope for dips back to the AUD/JPY112 area on a 3-month view. That said, a move lower in AUD/JPY will likely require a firming in expectations that the BoJ can hike for a second time later this year."

"While the market has been paring back perceived rate hike risks for some G10 central banks, given that real rates in Japan remain at extremely low levels, it can still be argued that there is significant risk of a BoJ rate hike in June."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)