Australian Dollar slips against Japanese Yen due to increased risk aversion

AUD/JPY extends its losing streak for the fourth consecutive day, trading around 110.70 during European hours on Thursday. The currency cross depreciates as the Australian Dollar (AUD) faces challenges amid escalating Middle East tensions that have weighed heavily on global risk sentiment.

However, recent developments show that Iran and the United States (US) struck tankers in the biggest wave of attacks on shipping since the war began, threatening to worsen the disruption of energy supplies from the Gulf. This pushed oil prices higher, intensifying inflationary pressures that have already started feeding into Australia’s consumer prices.

Consequently, expectations have grown regarding a fourth Reserve Bank of Australia (RBA) interest rate hike this year, a factor that could limit the AUD’s downside. Market participants are becoming increasingly confident in this trajectory, following warnings of upside inflation risks from Deputy Governor Andrew Hauser during an ABC interview on Tuesday.

Reinforcing this outlook, RBA Assistant Governor Sarah Hunter stated on Tuesday that the central bank may need to raise interest rates again if inflation proves more persistent than expected, keeping alive the prospect of another hike at its upcoming September meeting.

Global bond yields push toward multi-year highs

Deutsche Bank highlights that the recent back-up in global rates is not confined to Japan, noting that “Australia’s 10yr yield (+6.6bps) … is up to a post-2011 high of 5.27%, whilst Japan’s 10yr yield (+5.4bps) is up to 2.93%.” The bank points out that these moves underscore how both Australian and Japanese long-end yields are now trading near multi-year peaks as markets continue to reprice the path of policy normalisation.

BoJ’s Masu underlines steady path of policy normalisation

Deutsche Bank highlights that Bank of Japan board member Kazuyuki Masu struck a resolutely hawkish tone overnight, indicating that the central bank would “continue to raise the policy interest rate” as it advances its normalisation agenda. They note that Masu framed the policy objective in terms of price stability, stressing that “what is most vital from now on is to ensure that the underlying inflation rate does not significantly exceed 2%.”