**Speculation on BoJ Interest Rate Hikes** The AUD/JPY is currently trading near 93.00, down 0.55% during Tuesday’s Asian session. This follows the Reserve Bank of Australia’s (RBA) decision to reduce the Official Cash Rate by 25 basis points to 3.85% in May. The Australian Dollar has weakened as attention shifts to RBA Governor Michele Bullock’s upcoming press conference. The RBA is concerned about rising global trade tensions affecting the economy, noting a lower forecast for global growth due to US tariff policies. There’s increasing speculation about possible interest rate hikes from the Bank of Japan (BoJ) this year, which is supporting the Japanese Yen. BoJ Deputy Governor Shinichi Uchida anticipates that inflation in Japan will rise, implying that further rate increases might follow if the economy and prices improve. The RBA’s goal is to manage monetary policy to ensure price stability and economic welfare, mainly through interest rate changes. Higher interest rates generally strengthen the Australian Dollar, while quantitative easing (QE) and tightening (QT) are additional measures the RBA can take to influence the economy. Macroeconomic indicators like GDP and employment rates affect currency values. A strong economy typically leads to higher interest rates. Even though rising inflation often weakens a currency, it can now attract capital and boost it by leading to interest rate increases. **RBA’s Influence on AUD/JPY Trades** The AUD/JPY pair is slipping toward 93.00, showing a clear loss of momentum linked to the RBA’s recent decision. By lowering the Official Cash Rate to 3.85%, the central bank broke away from the trend seen recently, adopting a more cautious stance amid external uncertainties. This shift in rates signals a response to market uncertainty, which is reflected in the weakening of the Aussie. As speculation grows, it’s important to consider not just the RBA’s actions but also their future plans. Concerns over global trade tensions, primarily driven by US tariff strategies, complicate the macro landscape. The RBA’s current stance appears somewhat defensive, and investors are keenly watching for signs of further easing. Bullock’s comments in the press conference suggest that the board is more focused on external risks than domestic factors. If these worries persist, rate increases from the RBA may be limited for now, possibly indicating a longer pause. Turning to Japan, inflation expectations are becoming clearer. Uchida’s remarks offer direction for the BoJ, which has typically been slow to respond. If inflation pressures continue to build, we may see a quicker normalization of policy. With inflation likely remaining above 2% and markets expecting the BoJ to adapt, the Yen could continue to attract capital in the coming months. Market pricing shows that even cautious rate hikes are being taken seriously now. Given this context, it’s wise to reassess the approach to carry trades. The narrowing yield gap between the Australian and Japanese currencies is becoming practical, not just theoretical. As Australian rates trend lower or stabilize, and Japan’s policy may shift, long positions in both currencies may lose appeal. The risk-to-reward ratio in these trades could diminish quickly if the BoJ acts sooner than anticipated. We should also pay closer attention to employment data and inflation metrics for better positioning. In past cycles, inflation that exceeds predictions has led to rapid shifts in market pricing. This creates volatility that short-dated options traders can take advantage of. However, key macro events like Australia’s employment numbers or Japan’s wage growth will become crucial turning points. Any surprises here will not only influence spot rates but also affect implied volatility and positioning on both sides. It’s evident that the usual connections between rates, inflation, and currency strength are changing rapidly. Policymakers are reacting to post-pandemic economic shifts: higher inflation no longer signifies a weakening currency. Nowadays, a surprise in CPI might signal a tightening approach rather than a wage squeeze, altering how we analyze fundamentals. In this light, we are adjusting our assumptions about term structures. For the Aussie, traders should consider the accumulation of premium in long-dated options against falling rates. A flatter yield curve could make longer expiry options more appealing for reactive trading. On the Yen side, any indication of a rate hike or balance sheet tightening may lead to sharp short-term volatility. A short gamma position here can be risky without proper hedging. Practically, this means shifting strategies away from static long AUD/JPY trades held mainly for carry purposes. Momentum trades aimed at capitalizing on yield differentials must now factor in political risks, macro downgrades, and unexpected policy changes, all of which increase short-term risk. We have started to rebalance towards more dynamic setups, including spreads designed to profit from mismatches between realized and implied volatility. The skew is becoming more significant than the spot rate. Traders focused on mid-term outcomes should watch upcoming BoJ policy comments closely. To remain adaptable, it’s advisable not to rely too much on simultaneous moves between these two currencies. Both central banks are charting different paths after months of alignment. If this divergence is clear enough, it could open up opportunities, but only for those who are flexible and have a solid understanding of rate expectations. Create your live VT Markets account and start trading now.

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