AUD/JPY holds gains above 114.00 following news of easing US Strait blockade

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AUD/JPY inches higher after remaining flat in the previous session, trading around 114.10 during the Asian hours on Wednesday.

AUD/JPY firms as sentiment improves on news that the US may ease its naval blockade.
Risk-on sentiment rises after President Trump extends the ceasefire pending progress in negotiations.
Japanese Yen receives support from softer oil prices, reflecting easing supply concerns.

AUD/JPY inches higher after remaining flat in the previous session, trading around 114.10 during the Asian hours on Wednesday. The currency cross maintains its gains as the Australian Dollar (AUD) finds support from improving market sentiment after a Bloomberg headline, citing Tasnim News Agency linked with the IRGC, reported that Iran has received “some sign” the United States (US) may be willing to ease its naval blockade.

Moreover, US President Donald Trump extended the ceasefire until tangible progress is achieved in negotiations between both sides, according to Bloomberg. However, the US blockade on Iranian vessels remains in place after second-round talks collapsed, while Iran’s military warned of forceful strikes on preselected targets following repeated threats from Trump.

However, US Treasury Secretary Scott Bessent stated on Wednesday that the Navy will continue enforcing the blockade on Iranian ports, aiming to curb Tehran’s primary revenue streams by restricting maritime trade. Meanwhile, the UK Defence Ministry said military planners from more than 30 countries will convene in London for two days starting Wednesday to push forward plans to reopen the Strait of Hormuz and finalize operational details.

The upside in the AUD/JPY cross remains constrained as the Japanese Yen (JPY) stays firm amid softer oil prices, reflecting Japan’s significant reliance on Middle East crude imports. West Texas Intermediate (WTI) declines by nearly 1.5%, trading around $88.30 per barrel at the time of writing.

The JPY could face headwinds as reports indicate the Bank of Japan (BoJ) is likely to leave interest rates unchanged this month while evaluating the economic fallout from the Middle East conflict, though it may hint at a potential shift back toward policy normalization as early as June. The central bank is also expected to raise its inflation outlook while trimming growth forecasts, highlighting the impact of elevated energy costs and broader risks tied to the Iran conflict.

On the data front, Japan’s exports increased by 11.7%, surpassing expectations of 11% for a seventh consecutive month on robust demand from China and ASEAN economies. However, the trade surplus came in at JPY 667 billion, falling short of the projected JPY 1,106 billion.

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.