AUD/JPY recovered from earlier losses and rose about 0.38% on Tuesday, despite risk aversion linked to rising Middle East tensions. The move followed hawkish comments from RBA Governor Bullock, with the pair trading at 111.62 at the time of writing. The technical outlook remains positive, with price testing the upper trendline of a rising channel ahead of 112.00. The RSI stays bullish, though it has not exceeded its prior peak, suggesting a potential pause before another move higher.

Key Resistance Levels

Initial resistance is the year-to-date high at 111.70. Above that, the next levels are 112.00 and 112.82, calculated from 111.70 plus an Average True Range reading of 112. Key AUD drivers include RBA interest rates, the iron ore price, China’s economic performance, inflation, growth, trade balance, and broader risk sentiment. The RBA targets inflation of 2–3% and can also use quantitative easing or tightening. Iron ore is Australia’s largest export, worth $118 billion a year based on 2021 data, with China the main destination. Trade balance movements can also affect the currency by shifting demand for exports versus imports. The current strength in AUD/JPY is being driven by a clear difference in central bank policy. We see the Reserve Bank of Australia (RBA) maintaining a hawkish tone, while the Bank of Japan (BoJ) remains hesitant to tighten its own policy. This growing interest rate differential makes holding the Aussie against the Yen increasingly attractive for carry trades.

Policy Divergence Outlook

Recent data supports this view, as Australia’s January 2026 CPI report showed inflation at a stubborn 3.8%, surprising many and increasing bets on another RBA rate hike this year. This contrasts sharply with the situation in 2025, when we were debating the timing of rate cuts. The market is now pricing in a sustained period of higher rates in Australia. This divergence is amplified by Japan, where the BoJ continues to signal caution, delaying any significant policy normalization despite minor inflationary pressures. The policy gap between the two nations is now at its widest since mid-2025, fueling the currency pair’s rally. For traders, this makes long futures positions a straightforward way to capture the positive swap rate. Fundamentally, the Australian dollar is also receiving support from commodity prices and its key trading partner. Iron ore prices have stabilized near $135 a tonne, supported by better-than-expected industrial output data from China following their Lunar New Year holiday in February 2026. This improvement suggests demand for Australian resources will remain firm. Given the strong uptrend, buying call options is a prudent strategy for the coming weeks. This allows traders to participate in further upside toward the 115.00 level while strictly defining their maximum risk to the premium paid. Look for call options with expirations in April or May 2026 to allow time for the trend to play out. However, momentum indicators like the Relative Strength Index (RSI) are showing the pair is approaching overbought conditions, just as we saw during the rally in late 2025. This suggests a temporary pullback is possible before the next leg higher. Therefore, using any short-term dips to enter long positions or purchase calls could prove to be a more effective entry strategy. To manage risk, traders should also consider purchasing put options as a hedge against any sudden reversal in market sentiment. If the pair breaks below the well-established support of the upward-sloping channel, these puts would offer valuable protection. This creates a balanced approach to capitalize on the bullish momentum while being prepared for volatility. Create your live VT Markets account and start trading now.

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