AUD/JPY drew selling after a weak Australian labour report, but the move faded and the cross held above the prior day’s weekly low. The pair was last around 112.75, edging into modest gains and breaking a two-day slide. ABS data showed the unemployment rate rose to 4.5% in July from 4.4% a month earlier, while employment fell by 15.8K after a 76.3K increase in June; expectations had been for a 15K rise. Alongside soft Q2 CPI inflation, the figures prompted a pullback in pricing for an imminent RBA rate rise, weighing on the AUD.
RBA tightening expectations remained subdued, with market-implied policy rates indicating just 12 bps of hikes over a three-month view. On the Japan side, the JPY softened after trade figures showed a ¥634.5 billion deficit in July, while concerns over Japan’s fiscal trajectory and the interest rate differential with other major economies continued to pressure the currency. Those forces helped cap further declines in AUD/JPY, even after the week’s pullback from 113.60, the month’s swing high.
Range-Bound Strategy Amid Conflicting Forces
We suggest derivative traders adopt a cautious, range-bound strategy for the AUD/JPY pair over the coming weeks as conflicting economic forces keep the cross capped. While the pair has found temporary support near 112.75, the disappointing jump in Australian unemployment to 4.5% severely limits any immediate upside. We believe this weak labor data, combined with cooling inflation, effectively prices out any near-term interest rate hikes by the Reserve Bank of Australia.
JPY Fragility and Strategic Derivative Approaches
On the other side of the ledger, the Japanese Yen remains fundamentally fragile, hampered by a massive ¥634.5 billion trade deficit and ongoing concerns over Japan’s national debt. Historically, when Japan’s trade balance remains in deep deficit, the Yen struggles to sustain rallies even during periods of global market volatility. Consequently, we expect the wide interest rate differential between the two nations to prevent a rapid collapse in the cross, keeping the pair anchored above recent weekly lows for now.
Given this macroeconomic tug-of-war, we recommend utilizing range-bound options strategies, such as selling short-dated out-of-the-money call options near the 114.00 resistance level. For those seeking directional exposure, buying AUD/JPY put spreads is an attractive way to position for a potential breakdown below 112.00. This bearish tilt is well-supported by broader global headwinds, particularly as softer Chinese demand continues to depress the prices of key Australian commodity exports.
