AUD/JPY fell by more than 1% on Wednesday as demand for the Japanese yen rose after a landslide election win by Prime Minister Sanae Takaichi. At the time of writing, the pair traded at 109.23.
Yen strength is also linked to expectations of Bank of Japan policy normalisation and the possibility of Japanese authorities intervening in foreign exchange markets. The Nikkei Index has also risen amid speculation about further economic stimulus.
Technical Levels And Trend
Despite the drop, the broader trend remains upward, with price moving towards support near 107.99 where a trendline meets the 20-day SMA. A break below 108.00 could deepen the pullback, with the 50-day SMA at 105.75 as the next level.
If weakness continues, attention turns to the 100-day SMA at 102.74 and the 200-day SMA at 99.08. If the pair moves above 110.00, it may retest the yearly high of 110.79.
We remember when Sanae Takaichi’s victory in 2025 caused a sharp appreciation in the Yen, pushing AUD/JPY lower. The pair did break below the 108.00 level shortly after, eventually finding a floor near the 50-day moving average as predicted. This event established a playbook for how the market reacts to renewed prospects of Japanese policy normalization.
Today, the situation feels familiar, as the core theme of Bank of Japan policy change remains dominant. With Japan’s national core inflation holding at 2.5% year-over-year in the latest reading, pressure is mounting on the central bank to finally abandon its negative interest rate policy. This fundamental driver continues to put a cap on any significant Yen weakness.
Options Strategy And Market Pricing
On the other side of the pair, the Reserve Bank of Australia is facing a different picture. Australia’s quarterly inflation has cooled to 3.8%, down significantly from its peak, reducing the urgency for further rate hikes. This monetary policy divergence between a potentially hawkish BoJ and a neutral RBA creates a bearish fundamental backdrop for the AUD/JPY.
For derivative traders, this suggests positioning for a potential drop in the coming weeks. The setup mirrors the one we saw in 2025, where political shifts hinted at policy changes that ultimately strengthened the Yen. Buying put options on AUD/JPY offers a way to capitalize on potential downside while defining risk.
Looking at current options pricing, implied volatility for AUD/JPY is sitting near a six-month low of 9.8%, making puts relatively inexpensive. This presents an opportunity to position for a potential unwinding of the popular carry trade if the Bank of Japan signals a policy shift in its upcoming meetings. A break below the recent support at 107.50 could be the catalyst for a move back towards the 105.00 level.
