The AUD/JPY exchange rate rose to about 98.10 during Monday’s trading in Asia. This increase was influenced by the possible appointment of Sanae Takaichi as Japan’s first female Prime Minister and concerns about Japan’s fiscal health. China’s GDP growth in the third quarter was 4.8% year-on-year, matching expectations, with a quarterly growth of 1.1%. Industrial production increased by 6.5%, exceeding estimates, while retail sales grew by 3.0%.

Japan’s Political Changes

Japan’s ruling parties are forming a coalition government, and a vote for Prime Minister is coming soon. Analysts believe Takaichi’s leadership could lead to significant spending and easier monetary policy, which may affect the value of the Yen. The Japanese Yen’s worth is related to the Bank of Japan’s policies, bond yield differences, and market risks. The Bank of Japan (BoJ) has historically intervened to lower the Yen’s value and has maintained a very loose monetary policy since 2013, resulting in Yen depreciation. Recently, the BoJ has started to tighten its policy, impacting the Yen’s value. The Yen is often viewed as a safe-haven currency that strengthens during global market turmoil. Takaichi’s expected appointment as Japan’s Prime Minister is sending a clear short-term trading signal. Her reputation for advocating significant fiscal spending and loose monetary policy is causing the Yen to weaken. This is the main factor pushing the AUD/JPY exchange rate towards the 98.10 level.

Impact on AUD/JPY Pair

This situation could delay or even reverse the gradual policy normalization the BoJ began last year. The BoJ ended its negative interest rate policy in March 2024, which temporarily supported the Yen. The market now anticipates a return to a more dovish approach, benefiting the AUD/JPY. For derivative traders, the current upward momentum suggests buying AUD/JPY call options is a simple strategy. This allows traders to take advantage of further Yen weakness after Tuesday’s official vote, with risk limited to the premium paid. Considering strike prices around 98.50 or 99.00 for short-dated options could be wise. However, we also need to consider risks from Australia, where slowing growth in China is a concern. China’s GDP growth of 4.8% is down from 5.2% in the previous quarter, which may limit the Aussie’s strength. A bull call spread may be a more cautious approach, allowing for profit from a modest rally while reducing some of the premium costs. We should expect increased volatility leading up to the Prime Minister’s confirmation and any early policy announcements. This environment could make long volatility strategies, like straddles, potentially profitable if the new leadership introduces unexpected changes. Current sentiment suggests the path of least resistance is upward for this currency pair. Looking back, the AUD/JPY exchange rate tested the key psychological level of 100.00 multiple times in 2024. This historical resistance level will be crucial to monitor in the coming weeks. Trading strategies could be set around this level, either for profit-taking or preparing for a potential rejection. Create your live VT Markets account and start trading now.

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