Japan’s Akazawa and US Treasury Secretary Bessent recently spoke for about 30 minutes about trade tariffs. According to Japanese media outlet NHK, a trade agreement between Japan and the United States is not close. The meeting discussed the current state of trade between the two countries, but no solutions were found. This lack of a trade deal highlights ongoing disagreements about trade policies.

Currency Market Instability

Since there was no progress made during the talks, we expect the currency markets to become more volatile. The Japanese Yen is under a lot of pressure right now. This stalemate could lead to sudden and sharp changes in the USD/JPY exchange rate. Given this uncertainty, traders might want to look at options strategies that benefit from volatility instead of direction. With the USD/JPY exchange rate near a 34-year high around the 159 level, the chances of intervention or sudden changes in sentiment are higher. We suggest considering long straddles or strangles on this currency pair to prepare for a significant move in either direction. This situation will likely affect Japanese stocks, especially those that export goods. Major companies in the Nikkei 225 depend heavily on the U.S. market, which accounted for over $180 billion in Japanese exports in 2023. We are planning to buy put options on the Nikkei to protect against potential tariff threats or a stronger yen that could hurt exporter profits.

Prolonged Economic Uncertainty

Historically, long trade disputes, like the US-China conflict from 2018 to 2020, have caused extended periods of high market volatility. During that time, the VIX index often rose above 20, indicating significant market fear. We expect a similar situation might occur now, making long positions on volatility indices a wise decision. The political factors add another layer of long-term risk, as these discussions might hint at a more aggressive American trade policy. This suggests that uncertainty will last beyond the next few weeks and possibly through the U.S. election cycle. To capture this extended period of instability, we are looking into longer-term derivative contracts that expire in late 2024 or early 2025. Create your live VT Markets account and start trading now.

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