AUD/JPY gathers strength above 114.00 on Iran truce proposal

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The AUD/JPY cross gathers strength to around 114.15 during the early European session on Monday. Reports that Iran gave the US a proposal for reopening the Strait of Hormuz and ending the war improve market sentiment, supporting the riskier currencies such as the Australian Dollar (AUD).

AUD/JPY gains ground to near 114.15 in Monday’s early European session.
Iran offered the US a deal to reopen the Strait of Hormuz.
BoJ is expected to leave the policy rate on hold at its April meeting on Tuesday.

Iran has offered the US a fresh proposal to reopen the Strait of Hormuz and end the war. The plan called for extending the ceasefire so that both countries could work toward a permanent end to the war. The White House received the proposal from the Pakistani mediators, but it’s unclear whether the US wants to explore it.

The Australian March Consumer Price Index (CPI) inflation report will be released later on Wednesday. The CPI is projected to show a rise of 4.7% YoY in March, compared to 3.7% in February. If the report shows a hotter-than-expected outcome, this could solidify bets for a 25 basis point (bps) rate hike at the Reserve Bank of Australia’s (RBA) May 5 meeting and could underpin the Aussie against the Japanese Yen (JPY).

The Bank of Japan (BoJ) is widely expected to keep interest rates steady at 0.75%. The Japanese central bank is said to be still assessing inflation pressures on Japan's economy from higher energy costs. The meeting comes after the Japanese government last week said consumer inflation accelerated for the first time in five months in March.

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.