AUD/JPY at highs: carry trade, fragile balance

AUD/JPY at highs: carry trade, fragile balance

Technical analysis and comparison with the 2024 sell-off

The AUD/JPY cross has moved above the 112 level, marking new multi-decade highs and reinforcing one of the strongest trends in the global FX market. The move is once again driven by the carry trade, supported by the interest rate differential between Australia and Japan and the persistent weakness of the yen.

Yet beneath the surface, signs of fragility are emerging, recalling what happened in the summer of 2024, when a sudden shift in Japan’s monetary policy triggered a violent unwind of positions.

The engine of the rally: carry trade and monetary divergence

The mechanism behind the rally remains unchanged: investors borrow in low-cost yen to invest in higher-yielding assets, including the Australian dollar.

Despite the beginning of policy normalization by the Bank of Japan, Japanese rates remain relatively low compared to other advanced economies. This keeps the yen as the primary global funding currency, supporting capital flows into riskier assets.

Technical levels and market structure

From a technical perspective, the cross is in an advanced phase of its uptrend. Key levels currently monitored by market participants include:

• 110–110.5: main support and trend defense line
• 108.5–109.5: first sign of momentum deterioration
• 106.5–107.5: structural breakdown
• 103.5–105: potential unwind zone
• 100: critical threshold associated with systemic deleveraging

On the upside, the 113–118 range represents extension zones where the market could become vulnerable to sudden profit-taking.

In focus — Comparing with 2024

The current market setup shows clear similarities with the July–August 2024 period, but also key differences that alter the risk profile.

What happened in 2024

In late July 2024, the Bank of Japan surprised markets with a rate hike from 0.10% to 0.25%, accompanied by signals of reduced monetary stimulus.

This move, though modest on the surface, had a significant impact as it hit a market heavily exposed to carry trades.

In the following days:

• the yen strengthened rapidly
• investors began closing positions en masse
• volatility surged

At the same time, weak macroeconomic data in the United States fueled recession fears, amplifying the move.

The result was a systemic liquidation:

• widespread selling of risk assets
• yen appreciation
• sharp declines in crosses such as AUD/JPY

According to some estimates, the move wiped out hundreds of billions of dollars in carry trade-related positions.

Similarities with today

The current environment shows many comparable elements:

• Carry trade still dominant: the yen remains a funding currency
• Crowded positioning: many investors are on the same side of the trade
• Compressed volatility: a typical setup before sharp moves

As in 2024, market stability depends on a delicate balance between global monetary policy and macroeconomic conditions.

Key differences

However, there are important differences:

1. The Bank of Japan is more predictable today
   Markets are already pricing in a gradual rate path, reducing the element of surprise.
2. Greater risk awareness
   The 2024 experience has made investors more cautious in managing yen exposure.
3. No immediate shock
   In 2024, the trigger was sudden; today, there is no equivalent catalyst—yet.

The lesson from 2024

The key takeaway is that carry trades do not unwind gradually, but through rapid liquidation phases.

When:

• interest rate differentials narrow
• the yen strengthens
• or volatility rises

investors are forced to exit positions simultaneously, amplifying market moves.

A fragile equilibrium

The current market is therefore in a paradoxical state:
strong in trend direction, but fragile in its underlying structure.

The 110 level now represents a critical threshold. A break below could trigger dynamics similar to those seen in 2024, even in the absence of an equally strong shock.

Editor’s comment

"The market is not dangerous because it is at highs, but because it believes it got there without risk. 2024 showed that carry trades can work for months—only to break in a matter of days. The difference this time will be how quickly investors recognize the regime shift."

The information contained in this article is provided for informational purposes only and does not constitute investment advice or a solicitation to invest. The views expressed are based on data available at the time of writing and are subject to change.