AUD/JPY In Sharp Decline: Carry Trade Unwinds As Focus Shifts to Central Bank Pivots

The Australian dollar has seen a significant depreciation against the Japanese yen since late July. The AUD/JPY exchange rate declined from approximately 114.50 to lows between 109 and 110. While a rebound of over 1% yesterday pushed the pair above 111, it has since eased again.

These movements are influenced by differing central bank policies, the potential for intervention, and evolving market expectations for both the Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ).

What Drove AUD/JPY Sell-off and Rebound?

The sharp decrease in AUD/JPY during late July primarily resulted from a global unwinding of yen-funded carry trades. Previously, market participants borrowed yen at low interest rates to invest in currencies offering higher yields, such as the Australian dollar. However, market changes necessitated a rapid liquidation of these leveraged positions, leading to substantial buying of the yen across major currency pairs.

A notable factor emerged on July 30 when a rapid appreciation of the yen against major currencies led to widespread market speculation of official intervention by Japanese authorities. The AUD/JPY pair dropped more than 1.3% on that day and continued its downward trend in the following sessions, reaching its lowest point in several weeks.

Although Tokyo has not officially confirmed intervention, the magnitude of the currency move, combined with prior warnings regarding excessive yen weakness, provided strong indications to traders.

Yesterday’s temporary 1.0% rebound was sparked by a short-term resurgence in global equity markets and a temporary stabilization in risk appetite.

But the pair couldn’t hold onto those gains during today’s trading, which showed how vulnerable it still is. Softer commodity prices, particularly crude oil and industrial metals, have kept the growth-sensitive Aussie dollar struggling.

Near-Term Momentum and Outlook

Yesterday’s rebound proved the pair can still draw buyers when the yen eases up or broader risk appetite improves. But since it couldn’t hold onto those gains today, it seems the risk of intervention is still capping any rise.

Traders are now looking ahead to the RBA’s next decision and any further signals from the BoJ, like the summary of opinions and upcoming Japanese inflation data.

In the near term, AUD/JPY might trade in a wider range. Support could hold near recent lows of 109-110, with resistance possibly around 112-113. For a lasting recovery, we’d need clearer signs that Japanese authorities are stepping back, and that Australian data actually back up the current yield advantage.

On the other hand, more yen strength or a dovish shift in RBA expectations could extend the decline.

Over the medium term, the outlook depends on how quickly policies adjust. If the BoJ speeds up normalization while the RBA remains on hold, the yield gap would narrow and favor the yen.

If Australian inflation proves more persistent and Japanese tightening remains gradual, carry demand could reassert itself and lift the pair once intervention fears calm down.