AUD/JPY stayed firmer for a third day, trading near 113.40–113.50 during European trading on Wednesday. The move followed improved risk mood linked to the prospect of a second round of US-Iran talks.
US President Donald Trump said he is not considering extending the ceasefire and said he does not see it as necessary. He also indicated talks could resume this week, while opposing a 20-year suspension of Iran’s nuclear enrichment programme.
Reserve Bank of Australia Deputy Governor Andrew Hauser said the months ahead will be challenging for Australia amid an energy crisis tied to Middle East tensions and ongoing inflation pressure. He said persistent inflation and supply limits could raise the risk of a stagflation-like outcome.
The cross was also supported by a weaker Japanese Yen, as Japan relies heavily on Middle East oil imports. Oil prices rose on uncertainty over shipments through the Strait of Hormuz after the US military imposed a blockade, which tightened supply and raised doubts about further talks.
The Yen could find support from speculation about possible Japanese intervention. Bank of Japan Governor Kazuo Ueda said policymakers must watch the economic impact of the Middle East conflict, warning that higher oil prices could hurt Japan’s growth outlook.
We are seeing the AUD/JPY push towards 113.50 based on fragile hopes for US-Iran negotiations. This positive sentiment is the main driver, but it could evaporate quickly if talks falter. Any trader looking at this should understand the gains are built on speculation, not solid ground.
The underlying weakness in the Australian economy must be considered, as the RBA has warned of stagflation. Recent data shows Australian CPI remains stubbornly above 4%, reinforcing fears that the economy cannot handle another energy price shock. This makes holding long AUD positions a risky proposition beyond the very short term.
Oil prices are the critical factor, with WTI crude currently trading above $105 a barrel due to the tense situation in the Strait of Hormuz. We remember the energy price spikes of 2025, which showed how Japan’s import-dependent economy suffers, weakening the yen. This dynamic is currently supporting the AUD/JPY cross, but it is a double-edged sword that also hurts global growth.
However, we must watch for potential intervention from Japanese authorities, which becomes a significant risk as we approach the 115 level. We saw officials step in to defend their currency in late 2025 when instability threatened the economy. Any sudden strengthening of the yen would cause a sharp reversal in this pair.
For traders who believe a diplomatic breakthrough is imminent, buying short-dated AUD/JPY call options with a strike near 114 could capture a quick upward move. This strategy profits if the positive sentiment continues and the pair breaks higher. It is a direct bet on a successful de-escalation in the Middle East.
Given the high level of uncertainty, we believe strategies that profit from volatility are more prudent. Buying AUD/JPY put options would be a hedge against talks collapsing or a surprise intervention from the Bank of Japan. One-month implied volatility for the pair is now sitting above 13%, signaling that the market is bracing for a significant price swing.
