• AUD/JPY attracts buyers for the second straight day amid a combination of supporting factors.
• Reports that Japan's Takaichi may call an early election and the BoJ uncertainty undermine the JPY.
• The hawkish RBA also acts as a tailwind for spot prices, though a weaker risk tone might cap gains.

The AUD/JPY cross builds on its steady ascent for the second straight day and climbs to the 106.00 neighborhood, or a fresh high since July 2024, during the early part of the European session on Monday. Moreover, the fundamental backdrop favors bullish traders and suggests that the path of least resistance for spot prices remains to the upside.

The Japanese Yen (JPY) continues with its relative underperformance on the back of the uncertainty over the likely timing of the next interest rate hike by the Bank of Japan (BoJ) and a deepening Japan-China rift. In fact, China escalated its dispute with Japan last week and has begun restricting exports of dual-use goods, including some rare earth elements, to Japan. The ban follows a diplomatic row over Taiwan and heightens supply-chain risk for Japanese manufacturers, which is seen undermining the JPY and supporting the AUD/JPY cross.

Adding to this, the Yomiuri newspaper reported on Friday that Japan's Prime Minister Sanae Takaichi was considering holding a snap parliamentary election in the first half of February. This adds to layer of uncertainty and backs the case for a further near-term depreciating move for the JPY. The Australian Dollar (AUD), on the other hand, draws support from prospects of a near-term policy tightening by the Reserve Bank of Australia (RBA) and turns out to be another factor further contributing to the AUD/JYP pair's ongoing positive momentum.

This, in turn, validates the near-term positive outlook for spot prices, though the cautious market mood warrants some caution before placing fresh bullish traders. The US incursion in Venezuela, US President Donald Trump's threat of military action in response to the unrest in Iran, the White House’s insistence on acquiring Greenland, and the Russia-Ukraine war keep investors on edge. This, in turn, could benefit the JPY's safe-haven status and act as a headwind for the risk-sensitive Aussie. This, in turn, could cap any further gains for the AUD/JPY cross.