AUD/JPY holds positive ground above 99.50 as trade talks boost investor sentiment

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AUD/JPY holds gains around 99.35 in Friday’s early European session.
Optimism surrounding US-China trade talks supports the China-proxy Aussie.
Markets have postponed expectations for the next rate hike to December at the earliest.

The AUD/JPY cross trades on a stronger note near 99.35 during the early European session on Friday. Hope for a US-China trade deal provides some support to the Australian Dollar (AUD) against the Japanese Yen (JPY). Traders will take more cues from the speech from the Reserve Bank of Australia (RBA) Governor Michele Bullock on Monday.

The Aussie receives some support from easing trade tensions between the United States (US) and China. Both countries are set to begin high-level trade negotiations in Malaysia later on Friday, marking the fifth round of talks. China's Vice-Premier He Lifeng will participate in the meetings, as well as US Treasury Secretary Scott Bessent and Trade Representative Jamieson Greer.

US President Donald Trump and Chinese President Xi Jinping will meet next Thursday on the sidelines of the Asia-Pacific Economic Cooperation summit. The negotiation could range from resumed soybean purchases by Beijing to limits on nuclear weapons. The positive developments surrounding US-China trade talks could lift the China-proxy Aussie, as China is a major trading partner for Australia.

The JPY weakens against the AUD, even as core inflation in Japan accelerated in September for the first time since May. The report came ahead of the Bank of Japan’s (BoJ) policy meeting next week, where the central bank is anticipated to keep the interest rates unchanged.

Markets have postponed expectations for the next rate hike to December at the earliest, with most expecting it early next year. This, in turn, might cap the upside for the JPY. However, the cautious mood and uncertainty in the financial markets could boost the safe-haven currency like the JPY and create a headwind for the cross.

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.