AUD/JPY is currently trading at about 104.90. This rise stems from concerns about Japan’s fiscal situation and economic forecasts. Additionally, the Australian Dollar is supported by expectations for interest rate increases in Australia. The Governor of the Bank of Japan has stated that interest rates will rise if the economic and price forecasts are met. The Yen is under pressure due to Japan’s Prime Minister’s large spending plans, which raise concerns among businesses and could prompt currency interventions.

Global Risk Sentiment

The AUD/JPY pair may encounter difficulties due to global risk sentiment, especially from geopolitical events like the dispute between the US and Venezuela. Economic changes in China could also affect the Australian Dollar since the two countries are major trading partners. The Reserve Bank of Australia may raise rates if inflation data exceeds expectations in the upcoming report. The Japanese Yen’s value is influenced by the economy’s performance, the Bank of Japan’s policies, and traders’ risk perceptions. The Bank of Japan’s interest rate decisions and the difference between Japanese and US bond yields mainly influence the Yen’s value. In times of market volatility, safe-haven sentiment often boosts the Yen. The different monetary policies of Australia and Japan are key to this dynamic, suggesting a stronger AUD/JPY. The Reserve Bank of Australia has rates at 4.35%, while the Bank of Japan stands at just 0.10%. This makes the Aussie dollar appealing for carry trades. We are watching to see if this interest rate gap widens in the coming weeks.

Inflation Data Watch

Australia’s Q4 inflation report, due on January 28th, is highly anticipated. In Q3 2025, the annual inflation rate was a stubborn 5.4%, well above the RBA’s target. A similar result this month could prompt the RBA to raise rates at their meeting on February 3rd, boosting the AUD. Conversely, the Yen is weakened by not just monetary but also fiscal concerns. Prime Minister Takaichi’s proposed ¥20 trillion stimulus package raises worries about Japan’s already high debt, which was over 260% of GDP in 2025. This spending may continually press down the Yen’s value. A key risk for this trade is the recent rise in geopolitical tensions due to US military action in Venezuela. This has led to increased market fear, with the VIX rising from below 15 to over 19 in just a week. In such scenarios, the Yen often strengthens as investors seek safety, capping AUD/JPY’s potential gains. Given the strong fundamentals but a volatile geopolitical landscape, options could be a wise strategy. Buying call options on AUD/JPY allows for potential gains from a hawkish RBA while managing risk if the Yen sees increased safe-haven demand. The upcoming inflation data is a known factor that may increase volatility, making options beneficial for navigating possible price fluctuations. We should also watch for a slight slowdown in China, shown by the December Services PMI falling to 52.0. China’s economy faced significant challenges in 2025, and any further weakness could dampen enthusiasm for the Australian dollar, serving as a risk that may limit the AUD’s rise. Create your live VT Markets account and start trading now.

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