Japanese Yen and Aussie Dollar Forecasts: Politics, China Data, and Trade Wars in Focus

USD/JPY: Political Pressure Builds

USD/JPY faces a choppy session as the US-China trade tensions and Japanese politics collide.

Traders should closely monitor Tokyo as Sanae Takaichi faces an uphill battle to secure support for a majority coalition. The Liberal Democratic Party’s (LDP) long-standing coalition with Komeito ended abruptly on Friday, October 10, triggering immediate market volatility. USD/JPY soared to a daily high of 153.274 before tumbling to an October 10 low of 151.102 on the news.

The LDP leader has until October 20, her parliamentary confirmation deadline, to forge new alliances. Failure to form a majority government could reduce pressure on the BoJ to keep rates low, potentially enabling a rate hike. USD/JPY price volatility has heightened since her election win on Saturday, October 4.

Takaichi has reportedly held discussions with the Constitutional Democratic Party of Japan (CDPJ) and the Japan Innovation Party. However, the parties have yet to signal any willingness to join forces with a Takaichi-led LDP.

Fading chances of Takaichi becoming Japan’s first female prime minister could boost demand for the yen. Conversely, reports of the LDP leader gaining support from other parties to form a coalition government would likely weigh on the yen.

Outside of domestic politics, US-China trade developments could also influence USD/JPY price trends. An escalation in the trade war would likely boost demand for the yen as a safe-haven asset. However, signs of easing tensions could lift sentiment and appetite for the US dollar.

The USD/JPY pair retreated on Tuesday, October 14, in response to the US and China declaring port fees on cargo shipments.

Capitol Hill, Fed Speakers, and USD/JPY Outlook

Across the Pacific, market focus will return to Capitol Hill and the US Federal Reserve. A prolonged US government shutdown would leave FOMC members without crucial labor market data ahead of the October interest rate decision.

Economists expect the Fed to adopt a more cautious approach to monetary policy amid concerns over a cooling labor market.

Growing FOMC member support for back-to-back Fed rate cuts in October and December could push USD/JPY toward the 200-day Exponential Moving Average (EMA). If breached, 150 would be the next key support level.

On the other hand, calls to delay further monetary policy easing to tame inflation may send the pair toward the 50-day EMA. A sustained move above the 50-day EMA would bring the October 10 high of 153.274 into play.

USD/JPY Scenarios: BoJ Uncertainty, US Data, and Dovish Fed Bets

• Bearish USD/JPY Scenario: hawkish BoJ rhetoric, LDP party fails to find coalition partners, or dovish Fed comments could push USD/JPY toward 150.
• Bullish USD/JPY Scenario: dovish BoJ commentary, LDP forges new allies, or hawkish Fed rhetoric could send USD/JPY toward 153.274.

Read the full USD/JPY forecast, including chart setups and trade ideas.

Beyond Japan, market attention on China has also intensified, with key data and trade developments likely to influence the AUD/USD pair.

China Inflation and US-China Trade War in Focus

Turning the focus to the AUD/USD pair, Chinese inflation figures will give insights into the demand environment.

Economists forecast consumer prices will rise 0.2% month-over-month in September after stalling in August. A larger-than-expected increase could signal a sharper uptick in consumption, boosting demand for the Aussie dollar. On the other hand, an unexpected drop in prices may indicate weakening demand ahead of the Golden Week holiday. Falling prices would likely weigh on the Aussie dollar.

Traders should also consider producer price trends, given ongoing margin pressures. Economists expect producer prices to fall 2.3% year-over-year in September after declining 2.9% in August. Producers typically adjust prices based on demand conditions, passing cost increases or savings to consumers.

AUD demand would hinge on China’s economic strength, given that China accounts for roughly one-third of Australian exports. Improving demand could bolster Australian trade terms, the economy, and the Aussie dollar. Conversely, weakening demand could weigh on the Aussie dollar.

Beyond the data, US-China trade headlines will also influence AUD/USD trends. Rising tensions would weaken the Australian dollar, while hopes of a trade deal could lift sentiment.

AUD/USD: Key Scenarios to Watch

• Bearish AUD/USD Scenario: Weak Chinese data, dovish RBA comments, and rising trade tensions may push AUD/USD toward $0.645.
• Bullish AUD/USD Scenario: Strong Chinese inflation data, hawkish RBA rhetoric, and easing trade tensions may send AUD/USD above the 200-day EMA. A break above the 200-day EMA could pave the way for a move to $0.655.

See our full AUD/USD analysis for detailed trends and trade setups.

Fed Speakers and Interest Rate Differentials

While Chinese economic data and trade developments continue to drive AUD/USD volatility, traders should also monitor FOMC member speeches.

Rising expectations for Fed rate cuts in October and December could narrow the US-Aussie interest rate differential, favoring the Aussie dollar. A narrower rate differential could send AUD/USD above the 200-day EMA. A break above the 200-day EMA would bring $0.655 and the 50-day EMA into play.

On the other hand, concerns about sticky inflation and growing calls to delay further Fed rate cuts would widen the rate differential, favoring the greenback. A wider rate differential may push AUD/USD toward $0.645. A drop below $0.645 would enable the bears to target $0.64.

Key Market Drivers to Watch Today:

• USD/JPY: BoJ commentary and political headlines.
• USD/JPY and AUD/USD: Fed commentary, US-China trade developments, and Capitol Hill-related updates.
• AUD/USD: RBA speeches and Chinese inflation data.

For more in-depth analysis, review today’s USD/JPY and AUD/USD trading setups in our latest reports and consult the economic calendar.