AUD/JPY Drops as Strong Yen & Bearish Signals Pressure

Key Moments

Yen Strength Drives AUD/JPY Lower

AUD/JPY is trading weaker near 109.30 during early European hours on Tuesday, with the cross moving in negative territory as the Japanese Yen (JPY) gains against the Australian Dollar (AUD). The stronger JPY is being supported by substantial official activity in the foreign exchange market.

Quarterly disclosures from Japan’s Ministry of Finance (MOF) released on Monday show that the authorities intervened in the currency market on three separate occasions between July 30 and August 3. The largest operation occurred on July 30, with interventions totaling 7.98 trillion JPY ($50.36 billion), surpassing the prior high of 6.28 trillion JPY recorded on April 30.

“The enormous scale of intervention underscored the government’s sense of urgency to stem the yen’s decline,” said Tsuyoshi Ueno, senior economist at NLI Research Institute.

In addition to direct market operations, expectations that the Bank of Japan (BoJ) may raise interest rates further are also underpinning the Yen. The summary of the October 29-30 policy meeting published on Tuesday shows that many board members view a near-term rate increase as necessary, pointing to a meaningful possibility of a move in December.

Rabobank: Intervention Support, BoJ Policy, and JGBs Shape JPY Outlook

Analysts at Rabobank emphasize that the JPY has stood out among major currencies this year, noting that “the JPY is the second best performing G10 currency in the half year to date.” They acknowledge that this “strong ranking has been obtained with the support of sizeable FX intervention over 3 days during the summer, which included joint support with the US Treasury,” while also underscoring that the Yen has more recently shown resilience on its own.

On shorter time frames, Rabobank points out that “the JPY has managed to outperform the USD on a 1-month view with the market displaying a clear reluctance to push USD/JPY above the 158.70 area which coincides with the 200-day sma.”

Rabobank further notes that the “sell-off in the Nikkei 225 at the end of last week depressed market expectations regarding the chances of a December BoJ rate hike,” but they argue that “the strength of September wage data supports the potential for further policy tightening both next month and into next year.” Within this context, they state that the backdrop “suggests USD/JPY can edge lower to the 155.00 area on a 3-month view.”

They also remark that “another component of any JPY turnaround would likely be a more robust tone in the JGB market,” which “could contribute to a more supportive backdrop for the JPY in the months ahead.”

On domestic fundamentals, Rabobank highlights that “Japan’s primary deficit is better than the G7 average and there is speculation that Japan’s huge asset managers may be tempted to repatriate to take advantage of higher JGB yields. This would have positive implications for the JPY.”

Looking forward, they point out that “Q3 GDP data and October national CPI inflation, both due next week, will be of interest to BoJ watchers,” adding that they “remain cautiously optimistic on the medium-term outlook for the JPY.”

Technical Picture: AUD/JPY Holds Bearish Bias Under Key Moving Averages

From a technical standpoint, AUD/JPY maintains a negative short-term setup on the daily chart as prices remain below both the 20-day simple moving average (SMA) and the 100-day SMA. The pair is moving back toward the lower Bollinger Band, indicating persistent selling pressure.

The Relative Strength Index (14) sits near 41, staying under the neutral 50 threshold. This configuration signals that sellers retain control, even after a modest rebound from oversold conditions.

On the downside, the lower Bollinger Band at 108.85 is the closest support. A decisive move below this level would open the way to the November 6 trough at 108.24, followed by the February 13 low at 107.70.

On the upside, initial resistance is located at the 110.00 psychological mark, with further supply around the 20-day SMA at 110.30. The 110.70-110.75 band, which combines the upper Bollinger Band and the 100-day SMA, is the critical resistance area that would need to be reclaimed to alleviate the prevailing bearish tone.

Australian Dollar: Key Macro Drivers

One of the primary influences on the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). As Australia is rich in natural resources, the price of its major export, Iron Ore, is another major factor. Other important elements include the strength of the Chinese economy, which is Australia’s largest trading partner, as well as domestic inflation, economic growth, and the Trade Balance. Broader market sentiment also matters: a risk-on environment tends to support the AUD, while risk-off conditions typically weigh on it.

RBA Policy and its Impact on AUD

The RBA affects the AUD by setting the benchmark for interest rates at which Australian banks lend to each other, shaping borrowing costs across the broader economy. Its main objective is to keep inflation within a 2-3% range by adjusting rates higher or lower. Higher interest rates relative to other major central banks are generally supportive for the AUD, while comparatively lower rates tend to be negative.

Beyond rate moves, the RBA can deploy quantitative easing or tightening to modify credit conditions. Quantitative easing usually has a negative impact on the AUD, whereas quantitative tightening is typically supportive.

China, Iron Ore, and Australia’s Trade Balance

Conditions in the Chinese economy significantly influence the AUD, given China’s role as Australia’s largest trading partner. When China’s economy is performing well, its demand for Australian raw materials, goods, and services increases, boosting demand for the AUD. When Chinese growth falls short of expectations, the reverse is true. As a result, surprises in Chinese growth data often have a direct effect on AUD crosses.

Iron Ore, Australia’s largest export, is a central driver of the currency. Rising Iron Ore prices usually lift the AUD as overall demand for the currency strengthens, while falling prices tend to weigh on it. Higher Iron Ore prices also make a positive Trade Balance more likely, which is another supportive factor for the AUD.

The Trade Balance – the gap between export earnings and import spending – is itself a key determinant of AUD performance. Strong export demand relative to imports tends to push the currency higher due to increased foreign demand for Australian goods and services, whereas a negative Trade Balance typically has the opposite effect.