Insights 
VT 
The AUD/JPY pair rose to around 98.10 in Monday’s Asian trading session. The potential appointment of Sanae Takaichi as Japan’s first female Prime Minister and Japan’s fiscal health concerns influenced the movement.
China’s Q3 GDP growth was 4.8% year-on-year, matching expectations, with quarterly growth at 1.1%. The country’s industrial production rose by 6.5%, surpassing estimates, while retail sales increased by 3.0%.
Japan’s Political Changes
Japan’s ruling parties have agreed to form a coalition government, with a prime minister vote imminent. Market expectations suggest Takaichi’s leadership could lead to extensive spending and monetary easing, likely impacting JPY value.
The Japanese Yen’s value is linked to the BoJ’s policies, bond yield differentials, and market risks. The BoJ has historically intervened to devalue the Yen and has adopted an ultra-loose monetary policy since 2013, leading to Yen depreciation.
Recently, the BoJ has started winding down this policy, impacting YEN value. The Yen is also seen as a safe-haven currency, often gaining value during global market instability.
The expected appointment of Sanae Takaichi as Japan’s new Prime Minister is creating a clear short-term trading signal. Her reputation for favoring significant fiscal spending and loose monetary policy is weakening the Yen. We see this as the primary driver pushing the AUD/JPY cross towards the 98.10 level.
Impact on AUD/JPY Pair
This development appears to pause or even reverse the gradual policy normalization the Bank of Japan began last year. We recall that the BoJ ended its negative interest rate policy in March 2024, which provided some temporary support for the Yen. The market is now pricing in a return to a more dovish stance, creating a tailwind for AUD/JPY.
For derivative traders, the immediate upward momentum suggests buying AUD/JPY call options is a straightforward strategy. This allows us to capitalize on further Yen weakness following Tuesday’s official vote, with risk limited to the premium paid. Strike prices around 98.50 or 99.00 for short-dated expiries could be considered.
However, we must factor in the risk from the Australian side, where slowing growth in China remains a headwind. China’s Q3 GDP growth of 4.8% is down from 5.2% in the prior quarter, which could cap the Aussie’s strength. A bull call spread would be a more prudent strategy to profit from a modest rally while offsetting some of the premium cost.
We should also anticipate a spike in implied volatility leading into the prime minister confirmation and any initial policy statements. This environment makes long volatility strategies, like straddles, potentially profitable if the new leadership introduces unexpected measures. Based on current sentiment, the path of least resistance appears to be higher for the currency pair.
Looking back, the AUD/JPY cross tested the key psychological level of 100.00 several times in 2024. This historical resistance will be a critical area to watch in the coming weeks. Options strategies could be structured around this level, either taking profit or preparing for a potential rejection.
