AUD/JPY edged up to about 112.40 in early European trading on Thursday as the Reserve Bank of Australia’s hawkish stance supported the Australian dollar. Macquarie expects the RBA to leave the Official Cash Rate unchanged next week, while signalling in a way that sustains market pricing for a rate rise in August. Gains were tempered by concerns Japan could step in to curb yen weakness after Finance Minister Satsuki Katayama warned the government is watching speculative moves and stands ready to act.
On the daily chart, the cross remains above the 100-day Simple Moving Average, with price pressing the lower Bollinger Band at 112.26. The Relative Strength Index (14) sits around 39, pointing to bearish momentum even as the uptrend framework holds. Resistance is seen at the Bollinger middle band near 113.62, followed by the upper band at 115.00. Support lies at 112.25 and then the 100-day SMA at 111.75, where a sustained break would imply a deeper corrective move.
RBA Hawkishness Supports AUD, But Yen Intervention Risks Remain
We see the Reserve Bank of Australia’s hawkish stance supporting the Aussie dollar, especially since last week’s May Consumer Price Index (CPI) data for Australia showed inflation at 4.1%, well above forecasts. This keeps the underlying bid in AUD/JPY strong as the market now fully prices in an August rate hike. We are therefore holding a core long bias while the cross remains above the key 100-day moving average near 111.75.
However, the Japanese yen side of the equation presents a significant risk, capping the immediate upside. With USD/JPY trading near 159.50, the Ministry of Finance is on high alert for “speculative moves,” and we remember their multi-billion dollar interventions back in April and May of 2024 to support the yen. This very real threat of sudden yen strength makes us cautious about chasing this rally aggressively above the 113.00 level.
Managing Risk With Options Amid Uncertain Direction
This fundamental conflict between a hawkish central bank and potential currency intervention suggests a sharp move is coming, but the direction is uncertain. We believe implied volatility is currently too low given the event risk of the RBA meeting next week and the constant yen intervention threat. Therefore, we are considering buying straddles to profit from a significant price swing in either direction over the next few weeks.
For those of us already holding long positions, the risk of a sudden sell-off driven by Japanese officials is the main concern. We are looking to protect our downside by purchasing out-of-the-money put options with a strike price below the 112.25 support level. To finance these puts, we can simultaneously sell call options with a strike near the 113.62 resistance, creating a collar to hedge against an abrupt reversal.
