BofA recommends switch from buying AUD/JPY to USD/JPY amid geopolitical risks

Bank of America has advised investors to shift from AUD/JPY to USD/JPY positions, initiating a buy recommendation for USD/JPY at 145.25 with a target of 152.0 and a stop loss at 142.0, citing heightened geopolitical risks and Japan's reliance on Middle Eastern oil imports. The bank views USD/JPY as a more effective hedge against Middle East tensions due to U.S. energy independence, while AUD/JPY is seen as vulnerable to risk-off sentiment and correlated with the S&P 500; BofA maintains its long position on EUR/JPY as a structural trade.

Analysis

Bank of America has issued a tactical shift in its foreign exchange recommendations, advising investors to transition from AUD/JPY to USD/JPY positions, driven by escalating geopolitical risks and Japan's significant energy import dependency, particularly from the Middle East. The bank closed its prior AUD/JPY long recommendation, initiated at 92.8 on May 28, 2025, at a level of 94.18, and now proposes a new long position in USD/JPY with an entry point of 145.25, a target of 152.0, and a stop loss at 142.0. This strategic pivot is underpinned by the assessment that USD/JPY serves as a more effective hedge against Middle Eastern geopolitical tensions, benefiting from U.S. energy self-sufficiency and offering positive carry, whereas Japan's reliance on imported petroleum (over 90% from the Middle East) makes its currency vulnerable. BofA analysts suggest that elevated oil prices could further propel USD/JPY upwards, while AUD/JPY is susceptible to risk-off sentiment, evidenced by its strong correlation with the S&P 500, even surpassing that of AUD/USD. Concurrently, Bank of America maintains its structural long position in EUR/JPY, referencing its March 25, 2025 report, and highlights potential catalysts for broader risk-off market moves, including further geopolitical escalations and the re-emergence of reciprocal trade tariffs.

Key Decisions for Investors

• Investors should consider Bank of America's recommendation to switch from AUD/JPY to USD/JPY, particularly if their strategy involves hedging against Middle East geopolitical risks or capitalizing on potential yen weakness due to energy import costs.
• Closely monitor oil price movements and geopolitical developments in the Middle East, as these are key drivers for the recommended USD/JPY trade and the vulnerability of AUD/JPY.
• Assess risk tolerance given that the AUD/JPY pair is highlighted as sensitive to risk-off sentiment, and consider the structural long EUR/JPY position maintained by BofA as a potential portfolio diversifier or alternative yen-cross exposure.