AUD/JPY has dipped below 105.50, hitting around 105.40 during the Asian session after a drop in Australian inflation data. The Australian Consumer Price Index (CPI) increased by 3.4% year-on-year in November, down from 3.8% in October. This figure missed the expected 3.7%. The monthly CPI remained steady in November, matching the previous reading of 0%. This weaker inflation data has lowered expectations for an interest rate increase from the Reserve Bank of Australia (RBA) in early 2026.

Impact of Japan’s Interest Rate Decisions

There is uncertainty about the Bank of Japan’s future interest rate actions, which may affect the Japanese Yen. Most forecasts suggest a change by mid-2026. Japan’s Finance Minister has hinted that measures might be taken to address extreme currency volatility. Australia’s Trade Balance data, set to be released on Thursday, is also important for market watchers. Trade Balance stats, China’s economic activity, and Iron Ore prices are crucial for the Australian Dollar’s performance. The RBA guides the Australian Dollar through interest rate decisions aimed at maintaining a 2-3% inflation target. Demand influenced by Iron Ore prices and China’s economic condition is key to the strength of the Australian currency.

Market Expectations and Strategies

The Australian inflation data for November 2025 has shown less inflation than we anticipated, with the annual rate falling to 3.4%. This has caused the AUD/JPY to drop below 105.50, breaking its recent upward movement. The cooling inflation makes it challenging for the RBA to support another rate hike. Market expectations for an RBA rate increase in February 2026 have almost disappeared. In late 2025, there was at least a 30% probability of a hike, but this new data completely shifts that outlook. Now, the RBA is more likely to maintain current rates, which weakens support for the Australian dollar. On the other hand, uncertainty about the Bank of Japan’s next steps is significant. Many analysts predict a rate increase around mid-year, but the ongoing weakness of the Yen throughout 2025 could push the BoJ to act sooner. Any unexpected hawkish stance from Japan could greatly strengthen the Yen, leading to a decline in AUD/JPY. External factors are also not helping the Australian dollar. China’s economic recovery is uneven, and recent manufacturing PMI data from December 2025 shows a slight contraction, affecting Australian export demand. Additionally, iron ore prices have eased from their 2025 peaks of over $140 per tonne, now trading closer to $125. Given the differing policies of the central banks, we should consider strategies to take advantage of a falling AUD/JPY exchange rate in the coming weeks. Buying put options on AUD/JPY can be a way to aim for a decline while limiting potential losses if the BoJ remains inactive. Selling AUD/JPY futures contracts is a more straightforward strategy but requires careful risk management against any sudden comments from Japanese officials. Create your live VT Markets account and start trading now.

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