The AUD/JPY pair touched its yearly high of about 101.60 during late Asian trading. The Australian Dollar gained strength after positive labor data from Australia. It also performed well against major currencies, especially the Swiss Franc. The Australian Bureau of Statistics reported the creation of 42.2K jobs, much higher than the expected 20K. The unemployment rate decreased to 4.3%, lower than the anticipated 4.4% and down from 4.5% in previous data.

Improved Labor Conditions

Better labor conditions often lead traders to rethink their expectations for rate cuts by the Reserve Bank of Australia (RBA). Inflation pressures continue, with the Consumer Price Index (CPI) rising by 1.3% in the third quarter, compared to 0.7% in the second quarter. At the same time, the Japanese Yen remains stable, as the Bank of Japan (BoJ) is not expected to change its loose monetary policy. This aligns with Japan’s new Prime Minister Sanae Takaichi’s focus on fiscal expansion. Typically, an increase in employment boosts consumer spending and economic growth, helping the Australian Dollar. A drop in these numbers would be a negative sign. Currently, the AUD/JPY pair is nearing its 2025 highs around 101.60, supported by a surprisingly strong Australian jobs report for October. The addition of 42,200 jobs, more than double the forecast, strengthens our view that the Reserve Bank of Australia will keep its cash rate steady at 4.35%. The tight labor market resembles conditions from late 2023, keeping expectations of rate cuts off the table for now.

Monetary Policy Divergence

In contrast, the Japanese Yen remains weak as the Bank of Japan shows no immediate plans to tighten policy. After ending its negative interest rate policy in March 2024, the BoJ has taken a cautious approach, citing the need for sustainable wage growth. With core inflation in Japan around 2.5% for much of this year, a level similar to late 2024, the central bank feels justified in maintaining its accommodative stance. For those in the derivatives market, this growing policy gap makes the AUD/JPY carry trade more appealing. The strategy of borrowing in low-yielding Yen to invest in the higher-yielding Australian Dollar looks set to continue being profitable. We should consider buying call options on AUD/JPY for potential upside, or selling out-of-the-money puts to earn premium while remaining bullish to neutral. As we look ahead, the upcoming key data to watch will be Australia’s next monthly CPI report and Japan’s wage growth figures. If inflation begins to rise again in Australia, it could solidify expectations for another RBA rate hike, driving the pair higher. Conversely, a surprising increase in Japanese wage growth or a hawkish shift in BoJ communication could quickly change this outlook. Create your live VT Markets account and start trading now.

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