AUD/JPY edged lower after four days of gains, trading near 112.50 during European hours on Friday. The pair stayed subdued as the Australian Dollar held losses after China’s March CPI data.
China’s CPI rose 1% year on year in March, down from 1.3% in February and below the 1.2% forecast. CPI fell 0.7% month on month after a 1.0% rise previously.
China Inflation Data Pressures Aussie Dollar
China’s PPI rose 0.5% year on year, after a 0.9% decline, for its first increase since September 2022. The move was partly linked to higher energy costs amid disruptions in the Strait of Hormuz.
The Australian Dollar also faced pressure from renewed risk aversion tied to uncertainty around the US–Iran ceasefire. Planned US–Iran talks in Islamabad this weekend remained unconfirmed on Friday.
The Japanese Yen found support as markets priced in a possible April Bank of Japan rate rise amid oil-led inflation risks. Japan’s 10-year government bond yield rose to near 2.4%, close to its highest level since 1998.
Japan’s government considered releasing about 20 days’ worth of extra oil reserves from early May to steady domestic supply. The article was corrected on April 10 at 08:32 GMT to confirm CPI at 1% and that AUD/JPY fell after four days of gains.
BoJ Expectations And Hedging Strategy
The divergence between the Australian Dollar and the Japanese Yen presents a clear opportunity for us. China’s softer-than-expected inflation data is weighing on the AUD, given the close trade links between the nations. At the same time, the market is increasingly betting on the Bank of Japan to raise interest rates this month, which is strengthening the Yen.
This risk-off sentiment, driven by the fragile US-Iran ceasefire, is reflected across markets, with the CBOE Volatility Index (VIX) climbing over 15% in the last week to settle near 16.5. This shows a growing demand for portfolio protection. We believe buying AUD/JPY put options with expirations after the late April BoJ meeting offers a good way to position for a further decline from the current 112.50 level.
From a technical standpoint, we are watching the 111.80 level, which corresponds to the 100-day moving average and has acted as key support in recent weeks. Looking back, we saw a similar build-up in expectations in early 2024, just before the historic March rate hike that ended negative interest rates. A decisive break below this support could trigger a more significant downward move.
The sharp rise in Japan’s 10-year bond yield to nearly 2.4% signals that the local market is taking the prospect of another rate hike very seriously. All eyes will be on the Bank of Japan’s policy meeting scheduled for April 25-26. The government’s consideration of releasing oil reserves further underscores the domestic pressure building from energy-driven inflation.
