- The AUD/JPY has pulled back after a strong uptrend, with the momentum attributed to short-term profit-taking. However, the pair’s broader uptrend remains intact
- Joint interventions have not helped the yen much and stubborn inflation is a significant concern for Japan’s policymakers
- Despite the recent dip, the wide interest rate gap between the RBA and BoJ continues to favour carry trade in the long-term
The AUD/JPY currency pair climbed for over ten straight days from its early August low around 110.14. It started falling on Tuesday, though, and has kept dropping into today’s trading session.
Earlier this month, the pair rose from roughly 110-111 to a high near 113.27-113.65. It’s since dropped, however, to about 112.64-112.72. This move signals a break in the prior upward trend.
So, is this the start of a bigger downtrend? What’s making the yen stronger? And what does it mean for carry traders?
Is Momentum Shifting Lower?
Recent price movements point to a short-term pause, not a full trend reversal. The pair still trades above important long-term moving averages across various analyses, and the overall trend since the August lows still suggests a recovery.
However, technical indicators on medium-term charts, however, look more cautious. Some suggest short-term selling pressure has built up after the rapid ascent.
The Relative Strength Index (RSI) on daily charts has moved back toward the 50-52 range. This doesn’t automatically signal a bearish divergence. Instead, it likely shows the pair correcting from overbought conditions after a long period of gains
Reuters reports the Bank of Japan (BOJ) is getting ready to raise interest rates as early as its September 17-18 meeting. Policymakers might even speed up the pace of hikes beyond the current rate of about twice a year.
Policymakers are reportedly growing more concerned about ongoing inflation, strong global demand driven by AI, and the yen’s persistent weakness, even after joint currency interventions. Bank of America has even raised its year-end forecast for the yen, noting intervention needs faster rate hikes to be truly effective.
Implications for Carry Traders
The AUD/JPY is among the most popular currency pairs in carry trade. Traders usually borrow Japanese yen, with its low interest rates, to buy the Australian dollar, which offers higher returns. This rate difference made the pair appealing over the last year. But when the exchange rate falls, that advantage shrinks, and traders often adjust their positions.
If you’re already holding long-carry positions, the recent drop means your investments are worth less on paper. It also raises the risk of further selling if prices keep falling. If the carry trade loses its appeal, some investors might trim their holdings or look to hedge more.
On the other hand, if the pair stabilizes or starts to climb, the carry trade strategy will regain its appeal. This is especially true if Australian economic data stays strong and the Bank of Japan slowly tightens its monetary policy. When these shifts happen, the pair can become more volatile as traders adjust their leveraged positions.
It is not yet confirmed. The current decline follows a strong multi-session rally and looks like consolidation before a potential break of key support.
Market expectations for a Bank of Japan rate hike are up, there are lingering effects from late-July intervention, and policy outlooks differ when compared to Australia.
A falling AUD/JPY cuts the profit from borrowing yen to hold Australian dollars. This can prompt leveraged traders to reduce their positions.