AUD/JPY was trading near 110.55 on Wednesday, little changed on the session, as the pair sat between shifting expectations for monetary tightening in Japan and Australia. Rising energy prices are also a factor for Japan, which depends heavily on imported fuel, lifting the import bill and risking pressure on the trade balance.
Focus turns to the Bank of Japan decision on Friday, with markets seen as fully pricing a 25-basis-point rate rise that would take the policy rate to 1.25% from 1%, the highest since April 1995. Attention then moves to forward guidance and the prospect of another move in December, which could influence JPY and cap gains in the cross. In Australia, the Reserve Bank of Australia has kept the Official Cash Rate at 4.35% for the past three meetings after three earlier increases, while the RBA Rate Tracker implies nearly a 78% chance of a lift to 4.6% at the next meeting.
Derivatives Strategies Amid Central Bank Decisions
With AUD/JPY currently consolidating around the 110.55 level, we recommend that derivative traders prepare for a volatility breakout by utilizing long straddle or strangle option strategies. Both the Bank of Japan and the Reserve Bank of Australia are on the verge of major policy decisions, which historically triggers sharp currency swings. By purchasing both call and put options with an expiration date past the upcoming central bank meetings, we can profit from a sharp move in either direction.
Trading Scenarios: BOJ Hawkishness Vs. RBA Expectations
If the Bank of Japan proceeds with the expected 25-basis-point hike to 1.25% this Friday, it will lift borrowing costs to their highest level since April 1995. We must watch Governor Ueda’s press conference closely, as any hint of a follow-up rate hike in December will likely spark a massive rally in the Yen. To position for this hawkish outcome, we can buy short-dated AUD/JPY put options to capture the downside.
Conversely, we must not discount the Australian Dollar, given that market trackers now price in a 78% probability of an RBA hike to 4.60%. Japan’s heavy reliance on energy imports also leaves the Yen highly vulnerable to rising oil prices, which have climbed due to ongoing Middle East tensions and pushed Japan’s trade deficit wider in recent months. Because of this, buying out-of-the-money AUD/JPY call options is a smart way to gain cheap exposure to a potential rally if the BoJ underdelivers on Friday.
