AUD/JPY slips below 105.50, reaching near 105.40, during the Asian session following a decline in Australian CPI data. The Australian CPI rose 3.4% year-on-year in November, down from 3.8% in October, underperforming the anticipated 3.7%.
The monthly CPI remained unchanged in November after a previous 0% reading. Softer inflation data has reduced expectations for a rate hike from the Reserve Bank of Australia in early 2026.
Impact Of Japan’s Interest Rate Decisions
Uncertainty regarding the Bank of Japan’s future interest rate decisions may impact the Japanese Yen, with most predictions suggesting a move by mid-2026. Japan’s Finance Minister indicated that action might be taken to manage extreme currency volatility.
Australia’s Trade Balance data, expected on Thursday, remains a focus for market participants. The Trade Balance, Chinese economic performance, and Iron Ore prices are pivotal for the Australian Dollar’s valuation.
The Reserve Bank of Australia influences the Australian Dollar through interest rate policies aimed at maintaining a 2-3% inflation target. Iron Ore prices and China’s economic health are vital for demand, affecting the Australian currency’s strength due to their economic ties.
Market Expectations And Strategies
The Australian inflation data for November 2025 has come in softer than we expected, with the annual rate dropping to 3.4%. This has immediately pushed the AUD/JPY cross below 105.50, breaking its recent upward trend. This cooling inflation makes it much harder for the Reserve Bank of Australia to justify another interest rate hike.
We can see that market expectations for an RBA rate hike in February 2026 have now all but vanished. Looking back at late 2025, money markets were pricing in at least a 30% chance of a hike, but this new data point changes the outlook completely. The RBA is now more likely to hold rates steady, removing a key support for the Australian dollar.
On the other side of the pair, uncertainty around the Bank of Japan’s next move is a critical variable. While many expect a rate hike around the middle of this year, the persistent weakness of the Yen we saw throughout 2025 could force the BoJ to act sooner. Any surprise hawkishness from Japan would significantly strengthen the Yen and accelerate a fall in AUD/JPY.
External factors are not providing much support for the Aussie dollar either. China’s economic recovery remains inconsistent, with recent manufacturing PMI data from December 2025 showing a slight contraction, which weighs on Australian export demand. Furthermore, iron ore prices have softened from their 2025 highs of over $140 per tonne, now trading closer to $125.
Given this divergence in central bank policy, we should consider strategies that benefit from a falling AUD/JPY exchange rate in the coming weeks. Buying put options on the AUD/JPY offers a way to position for a decline while limiting potential losses if the BoJ remains passive. Selling AUD/JPY futures contracts is a more direct approach, but it requires careful risk management against any sudden verbal intervention from Japanese officials.
