AUD/JPY loses traction to near 113.50 as US-Iran tensions escalate after ship seizure

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The AUD/JPY cross loses ground near 113.65 during the early European session on Monday. Renewed tensions between the United States (US) and Iran provide some support to a safe-haven currency such as the Japanese Yen (JPY) against the Aussie.

AUD/JPY softens to around 113.65 in Monday’s early European session.
Traffic remains disrupted through the Strait of Hormuz after Iranian authorities declared it shut to shipping.
Markets expect a high likelihood of a third successive rate hike in May or June 2026.

The Strait of Hormuz was closed again, with the Iranian military sending out a broadcast declaring the strait closed and warning vessels not to approach it. Additionally, Iran’s Foreign Ministry spokesman Esmail Baghaei stated that the US blockade of Iran’s ports and coastline is an act of aggression that violates the ceasefire.

On the other hand, a hawkish stance from the Reserve Bank of Australia (RBA) might cap the downside for the cross. The RBA raised its Official Cash Rate (OCR) by 25 basis points (bps) to 4.10% at its March meeting last week. This marks the second consecutive rate hike of the year, following a 25 bps increase in February.

Markets are now pricing in nearly a 72%-77% probability of a rate increase in May, with expectations for a hike of nearly 99% by June, according to Reuters.

Bank of Japan (BoJ) Governor Kazuo Ueda on Friday avoided signaling an April rate hike, citing high economic uncertainty from the "negative supply shock" of the war. Financial markets now widely anticipate the Japanese central bank to hold rates steady until at least June 2026.

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.