Insights 
VT 
Impact Of Asian Markets
Traders are keenly watching for the RBA Governor Michele Bullock’s upcoming speech on Wednesday. Expectations are also set for China’s September Consumer and Producer Price Index reports which could influence the Australian Dollar.
Japan’s potential political instability might delay the Bank of Japan’s rate hike plans, possibly affecting the JPY. Verbal interventions from Japanese officials, including the Finance Minister, signal concerns over rapid exchange rate movements.
The Australian Dollar is influenced by RBA interest rates, the price of iron ore, and China’s economic health. A positive trade balance boosts the AUD, with shifts in iron ore prices significantly impacting the currency’s value.
Lower Chinese growth can negatively affect the AUD, given China’s status as Australia’s largest trading partner. These factors combined have a nuanced impact on the dynamics of the AUD.
Trading Strategies And Observations
We see the AUD/JPY cross facing pressure as the Reserve Bank of Australia signals a cautious, data-dependent approach to future rate cuts. This dovish stance from the RBA is clashing with potential weakness in the Yen, which is suffering from political uncertainty in Japan. The immediate focus for us will be on RBA Governor Bullock’s upcoming speech and key inflation data out of China.
Looking back, we remember the RBA held its cash rate at a peak of 4.35% for a long period through 2024 to crush persistent inflation. The current cautious tone suggests that while the fight is not over, concerns are shifting towards the impact of restrictive policy on growth. This makes upcoming Chinese economic data, such as the September CPI, particularly important, as China’s manufacturing PMI figures have struggled to remain in expansionary territory this past year.
On the other side of the pair, Japan’s political situation is causing traders to question the Bank of Japan’s path for further rate hikes. This comes after the historic decision back in March 2024 to finally end the negative interest rate policy. Any delay in further monetary tightening because of domestic politics would be a negative for the Yen, though we expect officials will continue verbal interventions to slow its decline.
Given this two-sided uncertainty, we should consider options strategies to capitalize on a potential spike in volatility. Buying straddles or strangles on AUD/JPY allows for a profit from a large price move in either direction, regardless of whether RBA caution or Japanese political risk becomes the dominant driver. Implied volatility for Yen pairs has been creeping up from the lows we saw in mid-2024, reflecting this growing tension.
For those with a more directional view, the fundamental weakness of the Aussie dollar, tied to a slowing China and a dovish RBA, seems compelling. We could consider initiating short positions, but the unpredictable nature of the Yen makes this a risky outright trade. A more hedged approach might be to express this bearish AUD view against the US Dollar instead, by shorting AUD/USD to isolate the Australian-specific factors.
We must also keep a close eye on commodity markets, specifically iron ore, which is a key driver for the Australian dollar. After seeing prices dip below $100 per tonne at points in 2024, any further weakening would add significant downward pressure on the AUD. Watching iron ore futures on the Singapore Exchange will be a critical leading indicator for us in the weeks ahead.
