The AUD/JPY is holding firm around the 99.00 mark, buoyed by easing US-China trade tensions as Trump retracts tariff threats. Simultaneously, Japan’s domestic political instability and delayed BoJ rate hikes weaken the JPY, supporting the AUD/JPY cross. The Reserve Bank of Australia’s (RBA) hawkish stance further aids the Australian Dollar’s strength.

The pair opened this week with a bullish gap, recovering from a Friday slump. It bounced back above 99.00, pausing the retracement from last week’s high of 101.00. The Japanese Yen’s safe-haven appeal is undercut by political chaos, including Komeito’s split from the ruling LDP, which exacerbates uncertainty and could delay BoJ rate increases.

Impact Of Us China Trade Tensions

Trump’s reversal on tariffs, communicating a desire for reduced economic conflict with China, boosts global risk sentiment, impacting the JPY adversely. The AUD remains steady despite China’s narrowed trade surplus. China’s September imports and exports grew significantly year-on-year, though the trade surplus expanded less than expected.

The Australian Dollar benefits from RBA’s forecast of potentially higher inflation in Q3. Factors influencing AUD include RBA interest rates, Iron Ore pricing, Chinese economic performance, and Australia’s Trade Balance. High-interest rates and strong Chinese demand for exports bolster the AUD, while lower rates and declining Iron Ore prices can reduce its value.

We are seeing the AUD/JPY cross find its footing around the 99.00 level, recovering from last week’s sharp sell-off. The immediate catalyst is the easing of US-China trade tensions, which improves global risk sentiment. This environment makes the high-yielding Australian dollar more attractive than the safe-haven Japanese yen.

The political situation in Japan is creating significant headwinds for the yen, and we expect this to continue. The collapse of the 26-year LDP-Komeito coalition injects a high degree of uncertainty, likely delaying any plans by the Bank of Japan to raise interest rates. Historically, we’ve seen that political instability in Japan often leads to a weaker yen as monetary policy tightening gets postponed.

RBA And BOJ Economic Outlooks

On the other side of the pair, the Reserve Bank of Australia is maintaining a hawkish tone. We’re closely watching the upcoming September quarter inflation data, with recent figures from the Melbourne Institute showing inflation remaining stubbornly above 4.5% annually. This pressure supports the view that the RBA may be forced to act again, contrasting sharply with the BoJ’s paralysis.

The outlook for Australia’s key exports also looks supportive for the Aussie dollar. Chinese import data showed surprising strength, which has helped push iron ore prices back towards their August 2025 highs of over $115 per tonne. As long as demand from China remains resilient, it provides a fundamental reason for the Australian dollar to strengthen.

For our strategy, this growing divergence between a hawkish RBA and a sidelined BoJ suggests the path of least resistance for AUD/JPY is higher. We see value in buying call options with strike prices above 100.00 expiring in the next several weeks to capture potential upside. This allows us to profit from a move higher while clearly defining our maximum risk.

However, we must remain aware of the potential for sudden shifts in risk sentiment. The backtracking on tariffs is positive, but the situation remains fluid, as we saw with the 250-pip drop last Friday. We can manage this risk by considering put option spreads below the 98.00 level to hedge against another sharp downturn.

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