AUD/JPY gave back the prior day’s gains and traded near 113.40 in early European hours on Tuesday. The cross fell as the Australian Dollar stayed weak after RBA minutes warned the Middle East conflict could add to inflation pressure and slow growth.
RBA Assistant Governor Sarah Hunter said higher energy costs could feed into consumer prices quickly due to tight conditions in the domestic economy. She said this could shift inflation expectations.
Japan Growth Data Fails To Lift Yen
The fall in AUD/JPY was limited as the Japanese Yen stayed weak, despite better-than-expected growth data from Japan. Japan’s GDP rose 0.5% quarter-on-quarter in Q1 2026, up from a downwardly revised 0.2% in Q4 2025 and above the 0.4% forecast.
On an annualised basis, GDP grew 2.1% in Q1, up from a downwardly revised 0.8% in the prior quarter and above the 1.7% forecast. This was the fastest expansion in six quarters.
Economy Minister Minoru Kiuchi said the government will monitor the effects of the Middle East conflict and higher prices on households and businesses. He said it will respond quickly.
The Reserve Bank of Australia is signaling deep concern over renewed inflation driven by the Middle East conflict, creating a headwind for the AUD. We see this weighing on the currency, especially since Australia’s inflation, which had cooled to 3.6% in the final quarter of 2025, is now threatened by rising energy costs. This situation complicates the RBA’s path, forcing it to consider holding rates higher for longer even as the economy weakens.
Volatility And Carry Trade Risks
Given this uncertainty, implied volatility on AUD/JPY options is likely to rise from its current levels. Traders should consider strategies that profit from price swings, such as buying straddles, which would benefit from a significant move in either direction. Looking back at how energy shocks impacted markets in 2022, we know that central bank commentary can cause sharp, unpredictable moves.
On the other side of the pair, Japan’s strong Q1 2026 GDP figures are not providing the JPY with much support. The market remains skeptical that the Bank of Japan will meaningfully tighten policy, remembering its very slow exit from negative rates back in 2024. As long as the BoJ maintains its accommodative stance, the Yen will likely remain a preferred funding currency for carry trades.
This creates a fragile situation for the popular AUD/JPY carry trade. The trade relies on stability, but geopolitical risks are rising, which typically causes these positions to unwind quickly. We saw similar rapid unwinds during the risk-off periods of 2020, and traders should be hedging their long exposure.
For the coming weeks, a cautious approach is best. Traders with a bearish view on the global economy could buy AUD/JPY put options to bet on a decline, with risk limited to the premium paid. This strategy capitalizes on the view that fears of an Australian slowdown will overshadow the persistent weakness of the Japanese Yen.
