AUD Surges as RBA Sounds Hawkish, BoJ Rate Hike Fails to Boost Yen

The Australian Dollar (AUD) surged to become the strongest major currency on Friday, while the Japanese Yen (JPY) weakened significantly. This unexpected outcome was largely due to policy surprises from the Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ). The RBA's Governor Michele Bullock testified that inflation is too high, citing the prolonged Middle East conflict, global AI boom, and extreme weather as factors driving energy, agricultural, and technology costs. This hawkish stance was more than markets had expected.

Meanwhile, the BoJ hiked its policy rate by 25 basis points (bp) to 1.25%, its highest level since 1995, but this move did not lead to a stronger JPY. In fact, the currency weakened past 157 against the US Dollar, while the 10-year Japanese Government Bond (JGB) yield fell by 4.9bp to 2.947%. The Nikkei 225 index rose by 1.38%.

The BoJ's decision passed with a 7-2 vote, but two policy board members, Toichiro Asada and Ayano Sato, dissented, preferring to keep the rate at 1.00%. Their votes suggested that faster normalization could face more resistance, despite US pressure on Japan to address JPY weakness.