JPY Softens Amid Tariff Tensions, AUD Supported by Hawkish Hold

The FX landscape remains volatile, with renewed trade tensions, central bank divergence, and inflation dynamics driving cross-asset positioning. 

Heading into today’s session, traders are sharply focused on developments in the yen and Australian dollar, both influenced by a combination of geopolitics and monetary signals.

JPY Under Pressure Tariffs and Policy Divergence Weigh

The Japanese yen extended its weakness as USD/JPY reclaimed levels above 146.00. 

The latest leg of depreciation follows a fresh wave of tariff uncertainty after Washington signaled its intent to impose a 25% levy on Japanese imports starting August 1st. 

While the market reaction has been muted possibly due to hopes for further delays or negotiated exemptions the trade risk premium is now back in focus for the yen.

The timing of this escalation coincides with increasingly dovish expectations around the Bank of Japan.

Recent wage data has disappointed, pushing back the likelihood of further rate hikes. 

The BoJ’s hesitance, in combination with elevated US yields and persistent rate differentials, leaves the yen vulnerable to renewed carry trade interest, especially in a risk-stable environment.

While some Asian currencies have shown resilience, the yen’s underperformance reflects its dual sensitivity to geopolitical stress and domestic rate stagnation. 

Unless the BoJ signals a more proactive stance, or the US trade posture reverses meaningfully, USD/JPY risks drifting higher.

AUD Bounces RBA Surprises with a Hawkish Hold

In contrast to the yen, the Australian dollar outperformed overnight, boosted by a surprisingly hawkish hold from the Reserve Bank of Australia. (I've talked baout this long trade AUDUSD on my latest analysis you can check here)

Markets had been largely priced for a 25bps cut, so the decision to leave rates at 3.85% despite three board members dissenting in favor of a cut was interpreted as a signal of policy patience.

Governor Bullock’s comments reinforced this view, emphasizing that the decision was about “timing, not direction.” 

The RBA remains cautious but is waiting for further inflation data (notably the Q2 CPI due ahead of the August meeting) before proceeding with further easing. 

Yields on the 2-year Australian note jumped nearly 10bps in response, helping AUD/USD to rally from 0.6510 to a high of 0.6558.

This resilience in the AUD reflects not just domestic policy dynamics, but also broader investor confidence that global trade frictions won’t derail the risk environment. 

With China stabilizing and commodity flows intact, the AUD remains an attractive risk proxy in G10 FX especially relative to low-yielders like the yen.

Central bank timing matters, but so does politics. The yen remains hostage to external forces, while the Australian dollar benefits from strategic patience and relative economic resilience. 

For now, traders may favor AUD/JPY upside, but any major shift in US tariff rhetoric or inflation data could quickly alter the calculus.

Stay nimble, and watch the calendar.

Why is the Japanese yen weakening despite geopolitical risks usually favoring safe havens?
The yen's weakness is being driven by two main forces: (1) the return of tariff risk, specifically the potential imposition of 25% U.S. import duties on Japanese goods, and (2) increasingly dovish expectations around the Bank of Japan, especially after disappointing wage growth data. Together, these factors erode the yen’s appeal, even as global risks rise.

What was surprising about the RBA’s latest policy decision?
Markets were almost fully pricing in a 25bps rate cut, but the Reserve Bank of Australia left rates unchanged at 3.85%. The decision wasn’t unanimous, but the "hawkish hold" surprised investors and pushed Australian bond yields and the AUD higher. The RBA signaled it is waiting for confirmation that inflation is sustainably falling before resuming cuts.

Is the recent AUD strength sustainable?
The short-term AUD bounce appears supported by both policy surprise and resilient risk sentiment globally. If the upcoming Q2 CPI does not show an upside inflation surprise, the RBA may resume cutting in August. However, if inflation remains sticky or trade sentiment improves, the AUD could continue to gain against low-yielders like the JPY.

How are markets interpreting the renewed U.S. tariff threats?
So far, the market sees the announcement more as a negotiation tactic than a firm commitment, especially given President Trump's openness to further delay. This has kept risk sentiment relatively stable and limited the broader FX impact. Still, the JPY remains sensitive to these developments given its trade exposure and BoJ policy inertia.

What currency pair is most likely to benefit from current macro dynamics?
Given the divergence between the RBA’s cautious optimism and BoJ’s ultra-loose stance, AUD/JPY stands out. The pair may gain further if the RBA remains on hold while BoJ stays sidelined amid trade pressure. However, traders should remain alert to CPI surprises and any shift in U.S. rhetoric that could alter the trajectory quickly.

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