AUD/JPY traded firmer at about 113.35 in early European dealing on Monday, supported by reports of a US–Iran peace deal that improved appetite for risk-sensitive currencies. CNN said the agreement will take effect on Friday, while Donald Trump said the US would lift its naval blockade of Iranian ports and the Strait of Hormuz would reopen after the deal is signed. Focus now turns to Tuesday’s policy decisions from the RBA and the BoJ.
The RBA is expected to keep its key rate unchanged for the first time this year, as money markets scale back expectations for further tightening. In Japan, a Reuters poll showed economists looking for the BoJ to lift rates to 1.25% in Q4 following a June move to 1.0%, which would mark the highest level since 1995. Technically, the cross remains above the 100-day SMA near 111.90 and the lower Bollinger Band around 112.25, with resistance at the Bollinger mid-line near 113.60 and the upper band at about 114.92; RSI sits close to 50.
Diverging Central Bank Policies Set The Stage
We see the AUD/JPY cross is getting a temporary lift from reports of a US-Iran peace deal, which boosts risk-taking. However, we believe the major moves in the coming weeks will be driven by the starkly different paths of the Reserve Bank of Australia and the Bank of Japan. The key events to watch are their interest rate decisions this Tuesday.
We anticipate the RBA will pause its rate hikes, which should put a ceiling on the Australian dollar’s strength. This view is supported by recent data showing Australia’s quarterly CPI has eased to 3.5%, slightly below forecast, while the unemployment rate has ticked up to 4.2%. These figures give the central bank a reason to hold steady and assess the economy.
On the other hand, we are preparing for a significantly stronger Japanese Yen as the Bank of Japan is widely expected to raise its interest rate to 1.0%. This policy shift is justified by Japan’s “shunto” spring wage negotiations, which resulted in an average pay increase of 5.5%, the highest in over three decades. This strong wage growth gives the BoJ the green light to continue tightening its monetary policy.
Trading Strategy Amid Central Bank Volatility
Given this fundamental clash, we see any rally towards the 113.60 to 114.90 resistance area as an opportunity to establish short positions. We are considering buying AUD/JPY put options to capitalize on a potential decline while managing our risk through the expected volatility of the central bank meetings. This strategy allows us to bet on a stronger yen without exposing ourselves to unlimited upside risk from any surprise announcements.
Our strategy will be confirmed if the pair breaks below the initial support level around 112.25. A decisive move below the 100-day moving average near 111.90 would signal that the uptrend is weakening and a larger correction has begun. This pattern would be consistent with the historical unwinding of carry trades that we’ve seen in past cycles when the Bank of Japan has moved from an easy to a tight monetary policy.
