The AUD/JPY stays strong around 107.00 thanks to solid Australian inflation data, which raises expectations for an interest rate hike by the RBA. This, along with negative feelings towards the Japanese Yen, supports the currency pair. The pair has risen from about 106.00, a one-week low, attracting buyers for the second day. Although prices showed slight gains after the Australian inflation news, they remain muted.

Australian CPI Data

The Australian Bureau of Statistics reported that the Consumer Price Index (CPI) rose to 3.6% year-on-year in December, up from 3.4%. The Trimmed Mean CPI increased to 3.3%, compared to 3.2% in November. These numbers boost expectations for a rate hike from the RBA and support the Australian Dollar. The Japanese Yen is weakening due to worries about Japan’s fiscal health and political uncertainty ahead of a snap election on February 8. While the Bank of Japan shows some confidence in a stable wage-price cycle, it also suggests it will keep its current policies, which limits losses for the JPY. The Trimmed Mean CPI, an important measure of Australian inflation, rose 3.4% year-on-year, surpassing expectations. This data is closely monitored by the RBA and may lead to interest rate hikes, affecting the Australian Dollar’s value.

RBA and BOJ Policy Implications

The strong inflation data from Australia sends a clear message. With the Trimmed Mean CPI at 3.4%, above what was expected, the Reserve Bank of Australia faces pressure to consider another rate increase at its meeting on February 4th. Past responses to similar surprises during the 2023-2024 tightening cycle suggest that the Australian dollar might strengthen in the short term. To take advantage of this, we could explore structured bullish strategies such as bull call spreads on AUD/JPY. With Australia’s unemployment rate holding steady at a low 3.9% through 2025, the RBA has the confidence to focus on controlling inflation. This approach offers a defined-risk opportunity to benefit from potential upward movement while limiting our exposure to risks from Japan. However, the political situation in Japan presents a significant risk as we approach the February 8 election amid a more hawkish Bank of Japan. It’s important to recall how Japanese authorities stepped in to support the yen when it weakened significantly in 2024; a similar scenario could happen again. Purchasing relatively inexpensive out-of-the-money puts on AUD/JPY can serve as a sensible hedge against unexpected policy changes or interventions that may bolster the yen. With these strong opposing forces, we can anticipate increased volatility in the coming two weeks. One-month implied volatility on AUD/JPY options has risen to 12.5%, reflecting market concern over competing central bank actions and political events. A long straddle strategy, which profits from large price swings either way, could be a smart way to navigate this uncertain period. Create your live VT Markets account and start trading now.

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