The AUD/JPY climbed to about 108.85 during Asian trading on Tuesday after the Reserve Bank of Australia raised its Official Cash Rate by 25 basis points to 3.85%. This is the first rate increase in over two years. Traders are looking forward to more information from the RBA press conference later, which may affect the strength of the Australian Dollar. In Japan, political uncertainty is rising as Prime Minister Sanae Takaichi has called for a snap general election on February 8. While Takaichi has previously supported a weaker yen, concerns about intervention from Japanese authorities could strengthen the yen, countering the recent gains of the AUD against the JPY.

The Role of the Reserve Bank of Australia

The Reserve Bank of Australia’s main job is to manage monetary policy, mainly by adjusting interest rates. Changes in inflation data can lead to shifts in interest rates that influence the value of the Australian Dollar. Additionally, the RBA uses Quantitative Easing (QE) and Quantitative Tightening (QT) as tools, with QE generally weakening the Australian Dollar and QT strengthening it. Economic factors like GDP and employment numbers also affect the AUD. A year ago, in February 2025, the AUD/JPY reached nearly 109.00 after the RBA increased its rate to 3.85%. Now, with the RBA at 4.35% and the Bank of Japan having ended negative rates late last year, the situation has changed. The pair is currently trading around 105.50 because the yield advantage for the Aussie has decreased. The RBA is likely to stay on pause for a while, especially after the recent Q4 2025 inflation report showed a cooling to an annual rate of 3.5%. This suggests limits on the Aussie’s strength, restricting any further rise for AUD/JPY. Traders might consider selling out-of-the-money call options to earn premium, betting that the pair won’t significantly rise in the coming weeks.

Focus on the Bank of Japan’s Next Move

For the Yen, all eyes are on the Bank of Japan’s next steps following their policy shift in November 2025. With January inflation in Tokyo steady at 2.5%, there is growing speculation about another small rate hike by mid-year. This potential tightening may keep implied volatility high, making long volatility strategies on the pair worth exploring. The attractive carry trade that defined early 2025 has lost its luster due to this policy shift. The risk for AUD/JPY in the short term seems tilted downward, influenced more by potential actions from the BoJ than surprises from the RBA. Thus, it seems wise to structure trades that profit from a declining spot price, such as buying put spreads to manage risk in the upcoming weeks. Create your live VT Markets account and start trading now.

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