Current Market Conditions

AUD/JPY dropped to around 105.00 in early European trading on Thursday, but the outlook remains mostly positive. The first resistance level is at 106.05, while initial support is at 102.65. The Japanese Yen is strengthening against the Australian Dollar as the Bank of Japan (BoJ) sticks to its current policies. Reports from January indicate that the economy in various regions is “recovering moderately.” Australia’s mixed inflation data for November has created uncertainty about the future actions of the Reserve Bank of Australia (RBA). The RBA’s Deputy Governor remarked that while November’s inflation was anticipated, no immediate interest rate cuts are planned. In terms of technical analysis, AUD/JPY is above the 100-EMA at 100.79 and the 20-period SMA at 104.35, which suggests a bullish trend. With the RSI at 62.04, momentum is steady and not indicating overbuying. The Bollinger Bands show increasing volatility, with the current price aiming for the upper band at 106.05. If the price closes above this level, the upward movement could continue, while resistance might lead to a consolidation around the middle band.

Key Influencing Factors

Several key factors influence the Yen, including Japan’s economic health, BoJ policies, bond yield differences, and overall market sentiment. The Yen is often seen as a safe investment during times of market volatility. The AUD/JPY pair is facing some selling pressure around the 105.00 mark, putting traders in a challenging position. Although the longer-term trend looks bullish, the immediate concern is a stronger Japanese Yen. This strength is fueled by the belief that the Bank of Japan will continue its policy normalization that began in 2024 and 2025. For the Yen, wage growth is a significant focus, raising expectations for moves by the Bank of Japan. After historic wage hikes during the 2025 spring negotiations, December data showed a 2.5% year-over-year rise in nominal cash earnings, exceeding forecasts. This sustained upward pressure makes a small rate hike in the first quarter more likely, supporting the JPY. On the Australian side, uncertainty remains despite the RBA’s firm stance against near-term rate cuts. The latest quarterly CPI data for Q4 2025, released last week, showed inflation at 3.9%, slightly above expectations, indicating that inflation remains persistent. This confirms the RBA’s cautious approach but does not strengthen the Australian Dollar against the more hawkish BoJ. Given these contrasting forces, volatility is the main theme, as indicated by the widening Bollinger Bands. Traders may consider using options to navigate this uncertainty, such as buying straddles or strangles ahead of major inflation reports from either country. This strategy allows traders to profit from significant price swings in either direction without needing to predict the outcome. For those who maintain a bullish outlook aligned with the long-term trend, buying call options with a strike price above the 106.05 resistance level may be a smart move. This strategy captures potential gains while limiting risk to the premium paid. Using the 102.65 support level for setting stop-loss orders or buying protective puts is another wise risk management approach. We should also monitor the narrowing yield difference between Australian and Japanese 10-year government bonds, a trend that has been developing since late 2025. While the spread continues to favor the AUD, its gradual tightening could pose a challenge for the AUD/JPY pair. Any acceleration in this trend might suggest that the short-term selling pressure is becoming more established. Create your live VT Markets account and start trading now.

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