AUD/JPY extends losses to near 97.50 on Soviet BoJ, rising geopolitical tensions

VaselineAugust 19, 2024

0 3 minutes read

AUD/JPY extends losses to near 97.50 on Soviet BoJ, rising geopolitical tensions

AUD/JPY loses ground on dovish sentiment around the BoJ.
Refuge flows amid rising geopolitical tensions provide support for the Japanese yen.
The downside to the currency cross could be limited due to the risk appetite, along with RBA calls.

AUD/JPY is depreciating near 97.50 in early European hours on Monday. The downside of the AUD/JPY cross is attributed to the improvement in the Japanese Yen (JPY), led by dovish sentiment around the Bank of Japan (BoJ) regarding its policy outlook.

Last week’s data showing Japan’s second-quarter GDP growth supports the potential for an interest rate hike by the BoJ in the near term. On Monday, Japan’s auto orders, a key gauge of capital spending, rose 2.1 percent from the month in June, beating estimates of a 1.1 percent increase. Markets are now anticipating Japan’s inflation numbers later this week for more information on the Bank of Japan’s monetary policy direction.

In addition, safe-haven flows amid rising geopolitical tensions may have supported the Japanese yen. Hamas rejected the terms of a hostage release and ceasefire deal discussed in Doha on Thursday and Friday, according to Reuters, citing a local Times of Israel news agency. In addition, concerns about escalating tensions between Ukraine and Russia have been heightened since Ukraine launched the largest invasion of Russia since World War II.

However, downside to the AUD/JPY cross could be narrowed due to improving risk sentiment along with the mood surrounding the Reserve Bank of Australia (RBA) on its policy outlook. Investors will be closely watching the RBA meeting minutes and the People’s Bank of China (PBoC) interest rate decision on Tuesday.

RBA Governor Michele Bullock said on Friday the Australian central bank was focusing on potential upside risks to inflation and did not anticipate any rate cuts in the near term. Bullock stressed that the RBA’s board believes it has struck the right balance between controlling inflation and maintaining stability in the current economic climate, according to ABC News.

Frequently asked questions about sense of risk

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 bear during the reference period. In a “risky” 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 to make a return, even if relatively modest.

Typically during “risk on” periods, stock markets will rise, most commodities – except gold – will also gain in value as they benefit from a positive growth outlook. Currencies of nations that are large commodity exporters are strengthening due to increased demand and Cryptocurrencies are rising. In a “risk-off” market, Bonds rise – especially major government bonds – gold shines, and safe-haven currencies such as the Japanese yen, Swiss franc and US dollar all benefit.

The Australian dollar (AUD), Canadian dollar (CAD), New Zealand dollar (NZD) and minor currencies such as the ruble (RUB) and South African rand (ZAR) all tend to rise in markets that are “risk-on” .This is because the economies of these currencies depend heavily on commodity exports for growth and commodities tend to rise in price during risky periods.This is because investors anticipate higher demand for commodities in the future the cause of intensified economic activity.

The main currencies that tend to rise during “risk-off” periods 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 world’s largest economy is unlikely to default. The yen, due to increased demand for Japanese government bonds, as a large proportion are held by domestic investors, who are unlikely to withdraw them – even in a crisis. Swiss franc, as strict Swiss banking laws provide investors with increased capital protection.

VaselineAugust 19, 2024

0 3 minutes read

Frequently asked questions about sense of risk

Vaseline

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