AUD/JPY Extends Rally on Widening Rate Differential

Key Moments

Rate Differential Supports AUD/JPY, But Intervention Risk Looms

AUD/JPY is trading on the front foot around 113.85 in early European hours on Tuesday, with the pair maintaining a positive tone as it stays above the 100-day simple moving average (SMA). The Relative Strength Index (RSI) is in bullish territory, signaling ongoing upside momentum.

The Australian Dollar (AUD) is gaining against the Japanese Yen (JPY), helped by the interest rate gap between the Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ). At the same time, concerns that Japanese authorities could step in to curb yen weakness may limit how far the cross can climb.

RBA Policy Stance and Shifting Rate Expectations

Earlier this year, the RBA implemented three straight 25 basis points (bps) rate increases. At its June policy meeting, the central bank then opted to keep the Official Cash Rate (OCR) unchanged at 4.35%.

Economists have cautioned that higher oil and fuel prices could solidify the case for a fourth rate rise this year if “US President Donald Trump’s renewed conflict with Iran is not resolved within a week.”

Following the resumption of airstrikes last week, market participants have increased their expectations for further tightening by the RBA. Traders are now assigning nearly a 23% probability to a rate hike in August and more than a 50% chance by December, according to the Guardian.

Technical Picture: Uptrend Intact Above Key Moving Averages

On the daily chart, AUD/JPY retains a bullish short-term configuration, supported by price action above both the 100-day SMA and the 20-day middle line of the Bollinger Bands. This setup keeps the broader upward trend in place. The pair is edging closer to the upper Bollinger Band, while the 14-period RSI near 60 indicates firm but not excessive buying pressure.

Key Technical Levels to Watch

Market participants are closely monitoring the following zones:

On the upside, the first barrier sits at 114.10, in line with the upper Bollinger Band. A break above that level would expose the May 13 peak at 114.74, followed by the round 115.00 mark.

On the downside, the July 20 trough at 113.10 offers initial support. Below that, the 100-day SMA at 112.75 and the Bollinger middle band at 112.55 are the next areas of interest. If selling pressure intensifies, the lower Bollinger Band around 111.05 provides a more substantial cushion in the event of a corrective pullback.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Australian Dollar: Key Drivers Highlighted

Several core factors typically influence the Australian Dollar (AUD):

• The interest rate stance of the Reserve Bank of Australia (RBA).
• Prices for Australia’s major export, Iron Ore.
• The condition of the Chinese economy, Australia’s largest trading partner.
• Domestic inflation, growth trends, and the Trade Balance.
• Global risk sentiment, where risk-on conditions tend to favor AUD.

RBA Decisions and Their Effect on AUD

The RBA shapes the AUD primarily through its policy on benchmark interest rates, which influence lending rates across the Australian economy. Its main objective is to keep inflation within a 2-3% band by adjusting rates higher or lower as needed. Higher rates relative to other major central banks tend to support the currency, while lower rates can weigh on it.

Additionally, the RBA may employ quantitative easing or tightening to steer credit conditions. Quantitative easing is generally considered negative for the AUD, whereas quantitative tightening is usually seen as supportive.

China, Iron Ore, and Trade Balance Links to AUD

The performance of the Chinese economy can have a direct impact on AUD, as stronger Chinese activity typically increases demand for Australian raw materials, goods, and services. Positive or negative surprises in Chinese growth indicators often translate into corresponding moves in the currency.

Iron Ore, identified as Australia’s largest export with China as the main buyer, is another crucial influence. Rising Iron Ore prices typically coincide with increased demand for AUD and can improve Australia’s Trade Balance, both of which are supportive for the currency. Conversely, falling prices can exert downward pressure.

The Trade Balance itself – the gap between export earnings and import payments – is an additional driver. A surplus, reflecting stronger demand for Australian exports relative to imports, tends to bolster the AUD, while a deficit can have the opposite effect.