Australian Inflation In Focus
Markets are watching Wednesday’s Australian inflation data, with headline inflation forecast to stay at 3.8% year on year in February. This follows the Reserve Bank of Australia raising the cash rate to 4.1% in a narrowly split decision, delivering back-to-back hikes for the first time since mid-2023. The pair may remain under downward pressure if the Japanese Yen strengthens on rising oil prices and inflation worries. The Bank of Japan kept rates unchanged last week but indicated it could tighten further, while there is also speculation Japan could intervene to limit sharp currency moves. “Risk-on” refers to higher demand for riskier assets, while “risk-off” points to demand for safer assets. In risk-off periods, bonds, gold, the US Dollar, Japanese Yen and Swiss Franc tend to benefit, while risk-on conditions often support equities, most commodities and currencies such as the AUD, CAD and NZD. We are seeing a familiar pattern in the AUD/JPY, with the cross struggling under the weight of risk-off sentiment, much like it did in early 2025. While last year’s tensions were focused on the Middle East, today’s concerns stem from renewed trade friction in the South China Sea, which is similarly pressuring the Australian dollar. This risk aversion is making traders reconsider long positions in commodity-linked currencies.Drivers For The Next Move
The focus on Australian inflation remains critical, just as it was when the headline rate was 3.8% a year ago. The latest data for February 2026 showed inflation unexpectedly holding firm at 3.6%, fueling speculation that the Reserve Bank of Australia may not be done hiking from its current 4.35% cash rate. However, this is counteracted by recent weakness in iron ore prices, which have dipped below $110 per tonne on concerns over Chinese industrial demand. On the other side of the pair, the Bank of Japan’s stance has evolved significantly since it signaled a readiness to tighten last year. Having exited negative interest rates in 2024, the BoJ is now on a slow but definite tightening path, with markets pricing in at least one more hike by year-end. This growing policy convergence with other central banks provides a fundamental tailwind for the Yen that was absent before. Given the heightened geopolitical risk and potential for Yen strength, we believe derivative traders should consider buying put options on the AUD/JPY. This strategy allows for profiting from a potential downturn in the cross while limiting the maximum loss to the premium paid. Volatility is increasing, and owning options provides exposure to downside moves driven by either a weaker AUD or a stronger JPY. Looking back, the major AUD/JPY rally of 2022-2024 was driven almost entirely by the massive policy divergence between a hiking RBA and a stationary BoJ. We are now witnessing the slow unwinding of that theme, suggesting the path of least resistance for the cross could be lower in the coming weeks. Therefore, positioning for a correction from these elevated levels appears to be the prudent move. Create your live VT Markets account and start trading now.
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