AUD/JPY is advancing for the third day in a row due to a weaker Japanese Yen (JPY). Factors undermining the JPY include uncertainty in Bank of Japan (BoJ) policies, a Japan-China rift, and election talks in Japan. These developments, along with a hawkish stance from the Reserve Bank of Australia (RBA), support the Australian Dollar (AUD).
The pair reaches mid-106.00s, its highest in over a year, as buyers continue to rally the currency. The outlook remains positive, though fears of intervention in currency markets by Japan’s Finance Minister could temper gains. Reports suggest authorities may act to curb further JPY depreciation.
Geopolitical Tensions Impacting JPY
The Japan-China relationship has strained, with China banning rare earth exports to Japan, impacting supply chains. This geopolitical tension adds to JPY’s downward pressure. The Nikkei 225 has hit a record high, conversely boosting the risk-sensitive AUD.
Despite the favourable conditions for AUD/JPY, overbought market conditions on the daily chart might limit further increases. Still, following a break past the 105.50 resistance, any pullback is likely a buying opportunity. The BoJ’s commitment to policy normalisation might deter fresh bearish JPY positions.
We see the AUD/JPY cross pushing into the mid-106.00s, a level not seen since we were in the middle of 2024. This recent rally shows strong momentum, with the pair’s one-month implied volatility now standing at 12.5%, a significant jump from last month’s 9.8%. Traders should consider that this breakout above the 106.00 mark is a strong bullish signal.
Market Dynamics and Pricing
The Japanese Yen’s weakness is being driven by multiple factors, including political uncertainty around a potential snap election. The key driver, however, remains the interest rate difference between Japan and its peers, as the 10-year Japanese government bond yield sits at just 1.1%. This makes holding Yen unattractive, especially with the Bank of Japan’s next policy meeting not expected until January 28th.
On the other side of the trade, the Australian Dollar is showing considerable strength. After last quarter’s inflation data in 2025 came in hotter than expected at 3.8%, the market is now pricing in an 85% chance of another Reserve Bank of Australia rate hike in February. This hawkish expectation is providing a strong tailwind for the AUD.
We must be cautious about the risk of government intervention to support the Yen. Back in 2022, we saw authorities step in forcefully when USD/JPY crossed the 150 level, and similar verbal warnings are now being issued. While the current AUD/JPY level might not trigger action, a rapid move towards 108.00 could attract official attention.
Given the strong upward trend but the significant risk of a sudden reversal from intervention, a simple long position is risky. A better approach for the coming weeks could be using options, such as buying a bull call spread. This strategy allows for participation in further upside while defining and limiting the maximum potential loss if Japanese authorities decide to intervene.
