- AUD/JPY retested the 110.50 level after securing four daily gains, driven by renewed appetite for risk-sensitive assets and technical buying.
- Cautious Bank of Japan communications reduced near-term rate hike expectations, while sticky Australian inflation keeps RBA rate hike risks plausible.
- Key risks that could reverse gains include stronger Japanese data, hawkish BoJ signals, weaker commodities or a broad risk-off move favouring the yen.
The AUD/JPY currency pair has fluctuated this week. The Australian dollar gained against the Japanese yen in four of the last six trading sessions, and after two straight declines, AUD/JPY approached the 110.50 level during the Asian trading session.
Is this recent upward movement a sustained recovery, or just a temporary pause before a potential decline?
Why Buyers Are Returning
Signals from the Bank of Japan (BoJ) are bringing buyers back. Even though the BoJ hiked interest rates in September, markets found its guidance less aggressive than expected.
Comments from Governor Ueda on Tuesday and statements from board member Ayano Sato, who advocated for a gradual approach to monetary policy tightening, suggest that borrowing the yen may remain inexpensive for now.
Markets now price in a much lower chance of an October rate hike from the BoJ, now around 12% compared to last week’s 40%. This shift has lowered immediate demand for the yen, potentially prompting carry traders to rebuild long positions in the Australian dollar.
Australia’s higher interest rate differential also provides ongoing fundamental support for the Australian dollar. The Reserve Bank of Australia (RBA) has kept a tighter monetary policy than the BoJ, which gives the Australian dollar a yield advantage.
Is the Upside Momentum Sustainable?
This upside momentum, however, needs more confirmation to prove sustainable. While buyers did push the pair back above the 110.00 psychological level, it’s still below its 100-day Simple Moving Average (SMA) near 112.45.
Short-term technical indicators, like the Relative Strength Index (RSI) on lower timeframes, look overbought. For this uptrend to continue, we’d need a clear daily close above 111.00.
Fundamentally, the interest rate differential and the BoJ’s cautious stance offer some support. But these gains will need ongoing confirmation to stick.
If Japanese monetary policy stays gradual and Australian economic data holds up, the pair might extend its recent climb. Yet, the broader technical picture suggests sellers could keep pushing down on rallies until it breaks past key moving averages.
Potential Disruptors Ahead
Several factors could disrupt the current rebound. Any hint of a more hawkish shift from the BoJ or stronger Japanese economic data could reignite rate hike expectations and strengthen the yen.
Reports suggest President Trump discussed concerns about yen weakness with Prime Minister Takaichi, sparking talk of a possible joint US-Japan intervention. This kind of intervention would directly oppose yen weakness, and it could happen with little warning.
On the Australian side, given Australia’s heavy reliance on raw material exports to China, any unexpected weakening in Chinese manufacturing or industrial output would hurt the Australian dollar.
A general move towards risk aversion in global markets also often sends investors to the yen as a safe-haven, potentially pushing AUD/JPY lower. So, we’ll need to watch upcoming central bank meetings and key economic data releases closely.
Softer comments from the Bank of Japan have reduced the odds of an October rate hike to about 12%, weighing on the yen. Meanwhile, Australia’s higher yields continue to support the Australian dollar.
The key factors that could disrupt recovery include  stronger Japanese economic data, more hawkish signals from the BoJ, weakness in commodity prices, or a broad move to risk aversion that strengthens the yen as a safe haven.
The 100-day Simple Moving Average near 112.45 is a significant overhead resistance. It’s currently capping any bigger upward moves.