Insights 
VT 
The AUD/JPY pair trades around 98.40 during European hours, buoyed by the Australian Dollar’s rebound and optimistic foreign inflows. Financial, real estate, and Gold stocks contribute to the upward momentum, while the S&P/ASX 200 index increases by 0.86%, influenced by weaker jobs data.
The Australian Bureau of Statistics reports a September Employment Change of 14.9K, missing expectations of 17K, along with a rise in the Unemployment Rate to 4.5%. Christopher Kent spoke about the cash rate being in a wide neutral range, suggesting recent rate cuts have eased financial conditions.
Challenges For AUD/JPY
Challenges for AUD/JPY arise from potential support for the Japanese Yen, as the BoJ’s remarks hint at interest rate adjustments aiming for neutral levels. Their board member emphasizes the central bank’s stance but withholds from discussing potential rate hikes at their October meeting.
Interest rates, set by central banks, impact economies by influencing inflation and lending behaviour. When high, they typically strengthen currencies by attracting global money. Gold prices tend to decrease with rising interest rates, as they offer no yield compared to interest-bearing assets.
The Fed funds rate is the overnight rate US banks charge each other, tracked by financial markets for anticipations of monetary policy decisions. The CME FedWatch tool follows these expectations closely.
We are seeing a clear conflict between a weakening Australian economy and a potentially strengthening Japanese Yen. Australia’s unemployment rate has just hit a four-year high of 4.5%, a significant jump from the sub-4% levels we became accustomed to back in 2023 and early 2024. This weak labor market data makes the Reserve Bank of Australia (RBA) more likely to cut its 3.65% cash rate next month.
Policy Divergence
On the other side of the pair, we have the Bank of Japan (BoJ), where board members are openly discussing the need to raise interest rates toward a neutral level. This continues the historic policy shift we saw in March 2024 when the BoJ finally ended its negative interest rate policy. A BoJ that is considering hiking while the RBA is set to cut creates a strong fundamental argument for a lower AUD/JPY exchange rate in the coming weeks.
Given this policy divergence, we should consider positioning for a move lower in AUD/JPY, perhaps by purchasing put options with a strike price below 98.00. This strategy allows us to profit from a potential decline while strictly defining our maximum risk to the premium we pay for the option. The current uncertainty could mean that implied volatility is still reasonably priced ahead of the upcoming central bank meetings.
However, we must also acknowledge the short-term AUD strength driven by stock market inflows, which could cause a temporary squeeze on short positions. To manage this risk, we could implement a bearish put spread, which lowers the cost of entry but also caps the potential profit. Alternatively, for those who believe a large move is coming but are unsure of the direction, a long straddle could capture a significant breakout if either central bank delivers a major surprise.
