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US-Japan Trade Talks
The Australian Dollar might strengthen after Australian Prime Minister Anthony Albanese wins a second term. The new government commits to policies that may fuel inflation, affecting the Reserve Bank of Australia’s ability to adjust interest rates.
Inflation data supports the AUD, with the TD-MI Inflation Gauge rising 0.6% MoM in April. Annual inflation is up to 3.3% from 2.8%, indicating ongoing inflationary pressures.
Tariffs are debated as protective economic tools but may raise prices and provoke trade wars. Donald Trump plans to use tariffs against Mexico, China, and Canada to bolster US producers and reduce taxes.
At around 93.40, the AUD/JPY pair reflects a balance tilting in favour of the Yen, primarily due to persistent hesitancy in global trade negotiations. The market has seen thinner-than-usual volumes stemming from a Japanese public holiday, though this temporary lull doesn’t reduce the broader directional drivers — especially those tied to risk sentiment and macroeconomic expectations.
Global Trade Negotiations
With trade negotiations between Washington and Beijing stalled, and neither leader planning face-to-face engagement, the appearance of progress is largely cosmetic. Based on Commerce Ministry assessments in Beijing, any shift could take weeks to materialise. That waiting game builds further demand for the Japanese Yen — traditionally seen as a shelter when negotiations falter or fail to produce tangible results. Risk-averse flows have not yet peaked, which implies a natural resistance point for AUD upwards momentum under current conditions.
US negotiations with Tokyo serve as an offsetting factor. Japan’s strategy centres on removing certain import taxes, particularly those targeting the vehicle sector. Reversing those Trump-era measures could also reopen trade channels and marginally weaken the Yen if investor sentiment gradually returns to a growth-oriented stance. However, these talks are under quiet pressure, with time constraints leading to limited flexibility. Removal of tariffs could, over time, narrow the short-term safe-haven advantage of the Yen.
Meanwhile, developments in Canberra add another layer to exposure across AUD-linked derivatives. With Albanese securing a second term, continuity in fiscal planning becomes more predictable. However, spending seen under his leadership — particularly in infrastructure and green energy sectors — aligns with upward pressure on prices. Inflation doesn’t appear to be fading. The TD Securities-Melbourne Institute inflation gauge showed a 0.6% lift month-on-month in April, which brings the annual pace to 3.3%. That’s a climb from the prior 2.8%, and it reinforces expectations that the Reserve Bank of Australia may need to hold or even tighten monetary policy sooner than previously anticipated.
As volatility creeps higher, derivative strategies may be best approached with a cautious bias against longer-term trend assumptions. For example, carry trades favouring AUD may come under stress unless upside interest rate differentials are confirmed by RBA action. At the same time, the relative strength of the Yen during macro shocks cannot be underestimated. We should consider reducing exposure where momentum lacks conviction, particularly until there is greater clarity on the US-China trade situation.
Tariffs, meanwhile, are not going away. Though pitched as temporary tools to support local industry, the use of tariffs across North American and Asian trade channels remains active. Trump’s intention to reintroduce them against multiple trading partners signals a return to protectionist measures. In economic terms, this could mean higher import costs and thereby fuel more inflation — the exact conditions central banks globally are attempting to rein in. The feedback loop from this style of policy making often leads to reactive rate adjustments, which then reshuffle options pricing, forward rates, and hedging costs.
What we’re seeing now is less about directional conviction in FX, and more about positioning with flexibility in mind. Patience might be underrated in the current environment. Hedging skew has begun to reflect that.
