The AUD/JPY pair has drifted lower, reaching about 102.70 in the early European session on Thursday. Despite this decline, the pair holds above the 100-day EMA of 99.44, maintaining an upward trend with the RSI indicating steady momentum at 54.91.
The Bank of Japan is anticipated to increase interest rates from 0.5% to 0.75% in its upcoming meeting, which would mark the first raise since January. This rate adjustment is set to take the benchmark to a three-decade high, with potential further increases depending on economic reactions.
Technical Analysis
In technical terms, the AUD/JPY sits just above the middle Bollinger band at 102.61, favouring continued upward movement. The resistance for an upward trend is at 104.43, while a lower boundary exists at 100.78, suggesting potential support. Any significant breakout would necessitate heightened volatility, considering the gradual band expansion.
Gold, while experiencing slight downticks, remains supported amid a stronger US Dollar. Meanwhile, the GBP/USD pair is holding steady as traders await key central bank events, including a BoE policy decision. Various markets are watching for the US CPI report, which could further influence currency pair movements and investment sentiments.
With the AUD/JPY cross drifting lower to near 102.70, we are facing a critical inflection point ahead of the Bank of Japan’s decision tomorrow. The market is pricing in a rate hike from 0.5% to 0.75%, which is fueling the Japanese Yen’s current strength. This move would mark the highest benchmark rate in Japan since the late 1990s.
The case for a hike is supported by strong domestic data throughout this year. Japan’s core inflation has remained stubbornly above the BoJ’s 2% target for over eighteen months, last printing at 2.7% year-over-year. Moreover, the landmark wage increases secured during the spring “Shunto” negotiations, which averaged over 5%, are finally filtering through the economy, giving the central bank the justification it needs to act.
Impact on Currency Pair
On the other side of the pair, the Australian dollar is facing headwinds. The Reserve Bank of Australia has held rates steady for the past two meetings as our own inflation has cooled slightly to 3.4%, reducing pressure for further tightening. Weakening industrial profit data from China, our largest trading partner, also casts a shadow over the AUD’s near-term prospects.
Given the high probability of a BoJ rate hike, derivative traders should consider positions that benefit from a stronger yen, which would push the AUD/JPY pair down. Buying put options with a strike price near the 101.00 level could offer a profitable way to trade a confirmed downward move. This strategy provides defined risk if the market has already fully priced in the BoJ’s action.
However, we must also consider the possibility of a “sell the news” reaction, where the yen weakens if the BoJ’s forward guidance is less hawkish than anticipated. A volatility play, such as a long straddle, could be appropriate for traders who expect a sharp move in either direction but are uncertain about the outcome. This involves buying both a call and a put option with the same strike price and expiration.
We should remember the market’s reaction to the BoJ’s historic policy shift back in March 2024, when it ended negative interest rates. The yen initially weakened following that announcement, as the move was widely expected and accompanied by cautious commentary. A similar outcome could unfold if tomorrow’s hike comes with language emphasizing that future moves will be slow and data-dependent.
Therefore, the key technical levels to watch will be the lower Bollinger band at 100.78, which serves as a logical target for bearish positions. A break below the 100-day EMA at 99.44 would confirm a significant shift in trend. Conversely, if the BoJ disappoints hawks, a surge toward the upper barrier at 104.43 would invalidate the immediate bearish outlook.
