The AUD/JPY cross currently hovers near 108.55 in the early European session. The Japanese Yen has weakened against the Australian Dollar due to the Bank of Japan’s decision on interest rates.
Maintaining its rate at 0.75%, the Bank of Japan has kept borrowing costs the highest they’ve been in 30 years. Board member Hajime Takata’s proposal to increase rates again was unsupported, despite a hawkish trend in the bank.
Economic Growth Potential
The bank’s outlook remains positive, forecasting economic growth for 2025 and 2026. Their continued stance aligns with their expectation of a moderate economic recovery.
Technical analysis reveals AUD/JPY remains above its 100-day EMA at 102.07, indicating strong bullish tendencies. However, the RSI at 77.21 suggests overbought conditions.
Potential pullbacks could aim for the Bollinger middle band at 105.85, with additional support at 103.62. The widening of Bollinger bands signals rising volatility and possible trend acceleration.
The Bank of Japan, employing monetary policy changes since 2013, has reformed its approach by abandoning ultra-loose policies. This decision was influenced by factors such as a weaker Yen and rising inflation above their 2% target.
Yens Weakness and AUDs Strength
The AUD/JPY cross is pushing higher around 108.55 after the Bank of Japan decided to keep its interest rate at 0.75%. This move was widely expected, but it confirms the Yen’s weakness as the BoJ appears less aggressive than other central banks. We see this as a continuation of the policy divergence that has been driving this pair.
While the trend is clearly bullish, we must be cautious as the daily chart shows signs of being overbought. The Relative Strength Index is above 77, a level that historically often precedes a price correction or a period of consolidation. Buying aggressively at these highs carries significant risk of a reversal back towards the 105.85 support level.
The Australian dollar’s strength is being supported by firm commodity prices, with recent data from early January 2026 showing iron ore holding steady above $140 per tonne. This, combined with the Reserve Bank of Australia’s consistently hawkish tone throughout late 2025, provides a strong fundamental reason for the AUD’s outperformance. The contrast with the BoJ’s cautious stance is stark.
Japan’s latest inflation figures from December 2025, which showed core CPI at 2.1%, gave the BoJ justification to pause its hiking cycle. After three separate rate hikes during 2025, this hold suggests the central bank is waiting for more data before committing to further tightening. This uncertainty is what is currently weighing on the Yen.
For the coming weeks, we should consider derivative strategies that protect against a short-term pullback. Buying call options with a strike price further out, or using call spreads, could allow us to participate in further upside while limiting our initial cost and risk. Selling uncovered puts is extremely risky here given how overstretched the market appears.
