AUD/JPY outlook: Jobs volatility puts RBA repricing in focus

• AUD/JPY strongly correlated with yield spreads and risk appetite in December
• Fed liquidity boost adds tailwind for risk assets into year-end
• RBA pricing flipped from cuts to multiple hikes in 2025
• Labour data volatility poses key risk to bullish Aussie positioning

Summary

AUD/JPY has ridden a wave of risk appetite and hawkish RBA repricing, but the rally faces a critical test with Australia’s jobs report. With bullish positioning stretched and technical signals flashing caution near 104.00, even a marginally weak print could trigger a sharp reversal. For traders, the focus now shifts to whether the data reinforces the tightening narrative or wrongfoots markets entirely.

Rate Differentials, Risk Appetite Power Bullish Move

AUD/JPY and relative central bank expectations for Australia and Japan continue to move in near lockstep, with risk appetite another important factor underpinning recent gains. The graphic below shows a strong and sustained positive correlation with two-year yield differentials between Australia and Japan in December, sitting at 0.94 over the past fortnight. It’s only slightly less for Nasdaq 100 futures at 0.86 over the same period, and 0.72 with Nikkei 225 futures.

Source: TradingView

With the Fed delivering anything other than a hawkish cut at the December FOMC meeting, lowering the funds rate by 25 basis points and signalling another two this cycle while simultaneously forecasting accelerated economic growth and declining unemployment, it’s gone a long way to underpin risk appetite for the remainder of the year. Resuming purchases of short-term Treasury bills is a cherry on top, with about $40 billion planned over the next month. The Fed is doing this to keep cash flowing and rates steady. For markets, it means liquidity stays supportive, adding another tailwind for risk appetite.

Unless we see an abrupt turnaround in sentiment, it suggests that for anyone trading AUD/JPY, the key swing factor looking forward may be shifts in the relative interest rate outlook for Australia and Japan. With a 25-point hike from the BOJ next week now bordering on a lock among traders, Australian economic data looks particularly important, especially after the significant hawkish repricing we’ve seen over the past two months.

 

Source: Bloomberg

As things stand, implied probability based on swaps pricing sees around a one-in-three chance of a rate hike from the RBA in February, with a full move priced by June. Fast forward another three months and more than two hikes are now priced in. It wasn’t that long ago that markets were pricing in multiple cuts next year, now it’s multiple hikes.

Jobs volatility puts Aussie bulls on notice

While the incoming data flow totally justifies the shift in pricing, the abruptness of the move leaves the Aussie vulnerable to any information that casts doubt on the need to begin tightening policy. Australia’s labour force survey, long known for its extremely volatile nature, screens as one such event that could put a major dent in hawkish pricing should it print even marginally weak. Such an outcome would likely wrongfoot markets, creating the potential for an abrupt move lower in the Aussie given likely stretched, near-term bullish positioning.

That’s the key risk heading into the data, likely resulting in a far larger move than if the data prints strong. The median economist looks for a 20,000 increase in employment in November, which would lift the unemployment rate to 4.4% should participation hold at 67% as expected. History suggests it’s the employment change that markets tend to react to first, generally because it sometimes resembles a random number generator, creating volatility. But it’s the unemployment rate that matters most for the RBA, along with measures such as underutilisation, youth unemployment and hours worked, which the bank likes to monitor for turning points in the labour market.

AUD/JPY Bullish Run Stalls

Source: TradingView

Looking at AUD/JPY on the daily chart, the pair has struggled above 104.00 over the past three days, failing to build upon the impressive bullish move seen since May. Wednesday’s doji candle despite the positive risk-on environment is also notable, suggesting a reluctance among traders to add to long positions. Combined with Tuesday’s bullish candle, it has the makings of a possible evening star bearish reversal pattern, depending on what unfolds today. We’re already seeing a pullback into the data, so a further extension on the downside would deliver a signal that a deeper pullback may be on the cards.

With RSI (14) rolling over from overbought territory, it suggests we may have seen the peak for upside strength, a view enhanced by MACD, which is also showing signs of rolling over towards the signal line. It’s not a bearish message by any stretch, but it does point to the need for caution if you’re considering buying the dip.

104.00 can be used to build setups around depending on how the price action evolves following the jobs data, allowing for a stop to be placed on the opposite side to entry for protection. On the topside, a move beyond Tuesday’s high would put resistance at 104.95 on the radar. On the downside, 103.00 brought out bids earlier this week, making it a reference point before uptrend support established in mid-November. If the latter were to be broken cleanly, 102.40 and 101.50 loom as potential downside targets for bears.