AUD/JPY breaks above 113 as yen weakness fuels carry trade

AUD/JPY climbed above 113 on Wednesday, breaking a multi-session consolidation as yen selling resumed across global currency markets.

"This is a pure yen-funded move — the Aussie is just along for the ride," said Sarah Lin, markets analyst at Edgen. "The carry trade remains profitable as long as the BoJ keeps policy accommodative relative to other major central banks."

The pair rose to 113.15 during Asian trading, its highest level since early July, after consolidating in a tight 112.40-112.80 range for three sessions. USD/JPY held near 162.41, while the dollar index slipped 0.35% to 100.682, confirming the move stemmed from broad yen underperformance rather than Australian dollar strength. The Aussie traded near $0.6750 against the greenback, little changed on the day.

The breakout shows how the yen carry trade continues to dominate global FX flows. The Bank of Japan raised its benchmark rate to 1.0% in June, and markets are pricing another hike by October. Each additional tightening step risks triggering a rapid unwind of the estimated hundreds of billions of dollars in carry positions, a dynamic that has historically caused sharp selloffs in risk assets before a structural dollar decline sets in.

The Australian dollar offers a cash rate of 4.35%, creating a spread of more than 300 basis points over the yen — enough to keep carry traders in the game despite the BoJ's June rate increase. That spread has been the primary engine behind AUD/JPY's sustained uptrend, with the pair gaining roughly 8% over the past six months. The Reserve Bank of Australia has held its cash rate steady since November 2024, maintaining the yield advantage that makes the Aussie an attractive target for carry flows.

Traders are now watching the BoJ's October meeting as the next potential inflection point. If the central bank delivers another rate increase, the immediate reaction could be a sharp yen rally that forces a temporary unwind of carry positions. But the medium-term outlook for the yen remains tied to whether the BoJ can sustain a tightening cycle while global growth slows and other central banks, including the Federal Reserve, begin cutting rates. The Fed has held its benchmark rate at 5.25% to 5.50% since July 2024, with markets pricing a first cut in September.

The move in AUD/JPY comes as gold trades at $4,000 per ounce, with the precious metal benefiting from the same dollar weakness that has accompanied yen strength expectations. The correlation between USD/JPY and gold has strengthened in recent weeks, with the two assets moving in opposite directions as traders position for a potential BoJ-driven shift in global liquidity conditions.

The breakout above 113 also carries implications for broader risk appetite. AUD/JPY is closely watched as a proxy for global risk sentiment, and its sustained advance suggests investors remain comfortable taking on leverage in pursuit of yield. A reversal below 112 could trigger a broader move away from riskier assets, particularly if it coincides with a spike in volatility or a sharp move lower in equity indices. For now, the path of least resistance remains higher as long as the BoJ maintains its gradual approach to normalization.

Asian equities traded mixed on Wednesday, with Japan's Nikkei 225 rising 0.4% as a weaker yen boosted export-oriented stocks, while Australia's S&P/ASX 200 slipped 0.2% as mining stocks weighed.

This article is for informational purposes only and does not constitute investment advice.