AUD/JPY has risen as the Japanese Yen weakens due to uncertainty over potential US tariffs of 30% or 35%. Additionally, the Bank of Japan’s cautious approach to raising interest rates poses more challenges for the Yen. The AUD/JPY pair has bounced back, sitting around 94.50 during the Asian trading hours. This gain follows recent comments from President Trump regarding potential tariffs on Japan, without extending the current deadline.

Bank of Japan Stance

The Bank of Japan is cautious about changing its monetary policy due to economic risks. Kazuyuki Masu and Governor Kazuo Ueda highlight that any changes in interest rates will depend on inflation trends. On the other hand, the Australian Dollar is facing challenges due to disappointing economic data. Retail Sales in Australia increased by only 0.2% month-over-month in May, missing the expected 0.4%. Building Permits saw a better performance, rising by 3.2%. Higher interest rates can make a currency more attractive to global investors. However, they can also decrease gold prices as the appeal of interest-bearing assets rises compared to non-yielding ones.

Fed Funds Rate Impact

The Fed funds rate—the overnight lending rate between US banks—affects market behavior and expectations. This rate is set by the Federal Reserve, and the CME FedWatch tool tracks future market predictions. With mounting pressure on the Japanese Yen from political uncertainty and a cautious central bank, it’s not surprising to see AUD/JPY move higher. The pair’s current position around 94.50 reflects ongoing market reactions to a shift in sentiment driven by potential trade restrictions and Japan’s domestic concerns. Trump’s tariff comments—suggesting a possible 30% to 35% import rate on products from Japan—have created anxiety. While one might expect some diplomatic softening, any perceived delay or uncertainty from U.S. policymakers tends to unsettle the Yen. Currency markets dislike ambiguity, and with the existing trade agreements nearing their end, the recent decline in Yen strength is more a recalibration than a surprise. Ueda’s focus on a data-driven approach to interest rate decisions serves to stabilize the situation, although it appears increasingly conservative given the rising global rates. Masu’s remarks further support this cautious stance, highlighting that any future rate hikes are likely to be small and slow, depending on steady inflation. This dovish outlook makes the Yen less attractive for carry trades, especially compared to the more aggressive G10 central banks. Meanwhile, Australia faces its own challenges. The stronger Aussie Dollar against the Yen hasn’t masked the underwhelming domestic figures. A retail sales increase of just 0.2%, half of what was expected, suggests sluggish consumer activity. The modest 3.2% rise in building permits is not robust enough to significantly impact monetary expectations. Weak demand figures could influence rate expectations moving forward, especially if similar trends appear in other sectors. It’s also important to consider developments across the Pacific. The Fed funds rate, a significant benchmark for comparing international yields, plays a critical role in cross-currency interest. With the CME FedWatch tool showing expectations for further hikes or holds by the U.S. Federal Reserve, interest rate differences continue to guide currency flows, including investments in Australian assets. We are closely monitoring how this environment affects gold and overall risk appetite. Rising U.S. rates typically increase the opportunity cost of holding non-yielding assets like gold, leading to recent price softness. This principle applies here as well—when a central bank is reluctant to raise borrowing costs, it becomes difficult to justify the strength of its currency without other risk factors at play. Market participants should remain vigilant for formal announcements from either Tokyo or Washington that could solidify trade policy direction. Until then, expect cautious optimism in AUD/JPY to persist unless broader risk-off sentiment or surprising domestic inflation data shifts the rate outlook. For now, a watchful approach seems most in tune with the current market dynamics. Create your live VT Markets account and start trading now.

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