Fundamental Drivers and Policy Divergence
We see the AUD/JPY cross holding firm above 113.00, driven by a determined Reserve Bank of Australia that is focused on fighting inflation. The fundamental picture supports the Australian dollar, as interest rates are likely to remain higher for longer in Australia compared to Japan. This policy difference is the main engine behind the uptrend. To make this more credible, Australia’s latest quarterly inflation report showed a reading of 3.8%, stubbornly above the RBA’s target band and surprising analysts. Consequently, interest rate futures markets are now pricing in a 40% chance of one more RBA rate hike by September 2026. This data confirms the central bank’s hawkish stance and provides a solid reason for the AUD’s strength. On the other side, the threat of intervention from Japanese officials to strengthen the yen is the biggest risk to this trade. Japan’s core inflation has remained above 2% for over a year, recently printing at 2.5%, putting pressure on the Bank of Japan to normalize its policy faster. Historically, verbal warnings from the Ministry of Finance become more frequent when currency moves are seen as too fast, and we are approaching those levels.Trading Implications and Risk Management
Given the strong uptrend but capped upside, we believe buying simple call options is too risky. The technical resistance near 114.90 is significant, and it’s a likely area where Japanese officials might increase their warnings, creating a ceiling for the price. The fading RSI momentum also suggests that the explosive upward moves may be behind us for now. Therefore, we are looking at bull call spreads as an appropriate strategy for the coming weeks. We would consider buying a call option with a strike price around 113.50 and simultaneously selling a call with a strike near 115.00, both with a July 2026 expiry. This approach allows us to profit from a continued, gradual rise while limiting our initial cost and defining our risk should intervention occur. If the cross fails to hold its ground and closes below the initial support level of 112.90, our bullish view would be temporarily paused. A break below this level could signal a deeper pullback towards the 100-day average near 111.60. In that scenario, we would look to exit bullish positions and possibly consider buying puts for a short-term hedge.Start trading now — click here to create your real VT Markets account.
