- The AUD/JPY pair broke past the 113.00 resistance level following previous quiet six session bounds between 111.95 and 112.81
- Yen weakness was fueled by interest rate differences and market confusion over speculation that Japan's massive pension fund might relocate foreign assets back home
- The Aussie dollar found solid fundamental support as global commodity prices remained firm despite the geopolitical tensions in the Middle East
After six sessions trading within a tight range of 111.95 to 112.81, the AUD/JPY pair moved decisively higher on Tuesday. It surpassed the 113.00 psychological level and continued its ascent today, nearing 113.39. So, what changed?
Speculation Over the World’s Largest Pension Fund Triggers Yen Selloff
Headlines regarding Japan’s Government Pension Investment Fund (GPIF) appear to be the primary driver behind the yen’s recent decline. Reports suggest the government is considering encouraging the massive pension fund to increase its investments in domestic assets to support local markets and the yen. While this sounds like it should strengthen the Japanese currency, the market reacted with immediate skepticism.
This skepticism stems from past attempts by the Japanese finance ministry to support the yen, which proved costly and ineffective. Â As CNBC reported, Tokyo’s finance ministry burned through roughly $73 billion defending the yen back in April and May, only to watch it slide right back toward the levels it started from.
Analysts suggest the yen’s weakness is rooted in structural issues. These include Japan’s growing public debt, a government focused on reflation, and inflation expectations that are not aligning with typical interest rate differentials.
On the Aussie side, the Reserve Bank of Australia has hiked its cash rate three times this year to 4.35%. Despite holding rates steady in June, RBA meeting minutes indicated ongoing concerns about inflation exceeding the target, with core inflation accelerating even as headline inflation eased.
A Finder survey of more than 40 economists shows 55% of them expect at least one more rate hike this year, likely in August. This policy stance supports Australian yields and the carry appeal of the Australian dollar.
Commodity prices and China’s economic performance also play a significant role. Australia, as a major exporter of iron ore, coal, and liquefied natural gas, benefits from resilient demand from China. Positive economic indicators from Beijing have bolstered risk sentiment and AUD strength.
Market Outlook Signals Bullish Bias with Caution
This breakout suggests a constructive near-term outlook for AUD/JPY, potentially targeting higher levels if policy divergence persists and global risk conditions remain favorable.
For those considering trading this breakout, entering at current levels around 113.40 presents some short-term risk. A sustained move above 113.58 on a daily closing basis would be the next key level to watch, potentially opening the way toward 113.90 and the 52-week high zone around 114.90.
Below the surface, though, this rally is fragile. A significant risk to long positions is the potential for direct market intervention by the Bank of Japan or the Ministry of Finance to support the yen. Such action could lead to a rapid and substantial decline in the AUD/JPY pair.
The breakout was caused by a combination of RBA rate-hike expectations supporting the Aussie and persistent yen weakness tied to Japan’s debt concerns and ineffective currency intervention.
The Australian dollar’s appreciation appears to be more a reflection of yen weakness than a substantial increase in the Australian dollar’s strength, although RBA policy has contributed positively.
Stronger Chinese demand for commodities like iron ore and coal increases Australia’s export revenues, improving its terms of trade and supporting the AUD.
