Japan’s trade negotiator, Akazawa, is planning another trip to the United States next week. This visit will focus on discussions about tariffs, as the deadline is approaching on August 1. This will be Akazawa’s tenth visit for these ongoing talks, with only two weeks left to reach an agreement.

Binary Outcome and Currency Volatility

With the upcoming visit, it’s clear we should prepare for a binary outcome around the August 1st deadline. The best play is on currency volatility. The one-month implied volatility for USD/JPY has risen to about 8%, up from roughly 6% last month. This indicates that the options market expects a big move. We recommend buying straddles or strangles to be ready for significant changes in either direction. The uncertainty from these tariff discussions is also affecting equities, making it crucial to protect against potential losses in the Japanese market. We have observed an increase in the put-to-call ratio on Nikkei 225 futures, now over 1.0. This suggests that traders are purchasing more protection against declines than betting on gains. Buying puts on the index or major export-driven ETFs is a smart way to shield portfolios from a negotiation breakdown. Historically, these intense negotiations stem from ongoing trade imbalances. Recent data shows the U.S. goods trade deficit with Japan was $5.8 billion in March 2024. This situation reminds us of the U.S.-China trade war, where critical deadlines in 2019 led to the VIX volatility index spiking above 20 due to negative news. We can expect similar turbulence and should consider long positions on volatility as a cost-effective form of portfolio insurance.

Implications for the Auto Sector

For a more focused strategy, we are paying attention to the auto sector, which is a major area of concern. If talks fail, tariffs could severely impact Japanese car manufacturers. We see a chance to buy put options on major Japanese automakers while also keeping an eye on the strength of their American counterparts. However, we must not ignore the possibility of a surprise agreement, as it’s often said, “the tenth time’s the charm.” If a deal happens, it could lead to a relief rally in Japanese stocks and a stronger yen, hurting those who are only positioned for a decline. Therefore, we are also considering low-cost, out-of-the-money call options on the Nikkei as a budget-friendly way to take advantage of significant upside if a last-minute deal is reached. Create your live VT Markets account and start trading now.

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