The AUD/JPY pair is trading at about 98.40 during European hours, thanks to a rebound in the Australian Dollar and positive foreign investments. Stocks in finance, real estate, and gold are driving this upward trend, while the S&P/ASX 200 index rises by 0.86% due to weaker job data. The Australian Bureau of Statistics reports an Employment Change of 14.9K for September, which is below the expected 17K. Additionally, the Unemployment Rate has increased to 4.5%. Christopher Kent mentions that the cash rate is in a wide neutral range, hinting that recent cuts have improved financial conditions.

Challenges For AUD/JPY

The AUD/JPY faces challenges as the Japanese Yen may gain support. Comments from the Bank of Japan (BoJ) suggest they may adjust interest rates to achieve neutral levels. A board member highlights the central bank’s position but does not discuss possible rate hikes at the October meeting. Interest rates set by central banks are crucial since they influence inflation and borrowing. Higher rates often strengthen currencies by attracting global funds. Gold prices generally fall when interest rates rise, as gold yields nothing compared to income-generating assets. The Fed funds rate is the overnight rate that U.S. banks charge one another, and financial markets closely monitor it to gauge future monetary policy changes. The CME FedWatch tool tracks these expectations. We are witnessing a clear struggle between a weakening Australian economy and a potentially stronger Japanese Yen. Australia’s unemployment rate has hit a four-year high of 4.5%, a notable increase from under 4% seen in early 2023. This weak job data suggests the Reserve Bank of Australia (RBA) may cut its cash rate of 3.65% next month.

Policy Divergence

On the other side, the BoJ is discussing the need to increase interest rates toward a neutral level. This trend follows the significant policy change in March 2024 when the BoJ ended its negative interest rate policy. The prospect of the BoJ raising rates while the RBA considers cuts creates a strong case for a lower AUD/JPY exchange rate in the coming weeks. With this policy divergence, it may be wise to position for a decline in the AUD/JPY. One strategy is to buy put options with a strike price below 98.00. This allows us to profit from a potential drop while limiting our risk to the premium we pay for the options. Current uncertainty might mean that implied volatility is still reasonably priced before the upcoming central bank meetings. We should also recognize the short-term strength of the AUD due to stock market inflows, which could pressure short positions temporarily. To mitigate this risk, we might use a bearish put spread, which reduces the entry cost but caps potential profits. Alternatively, if you expect a significant move but are unsure of the direction, a long straddle could capture a major breakout if either central bank surprises the market. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now