The Japanese Yen (JPY) recovered some of its earlier losses after Japan’s Prime Minister denied rumors about his resignation. Additionally, hopes about a US-Japan trade deal helped the Yen, leading to a pullback in the USD/JPY by around 50 pips. Market sentiment and lower chances of an interest rate hike by the Bank of Japan (BoJ) kept the JPY from rising further. The US Dollar’s slight rebound from a two-week low also helped maintain minor gains in the USD/JPY.

Japanese Resignation Rumors

Japan’s Prime Minister clarified that he hasn’t talked about stepping down, pushing back against media reports. The US announced a trade deal with Japan that includes reciprocal tariffs, easing economic worries and boosting the Yen against the Dollar. Political uncertainty in Japan limited the Yen’s gains, as the ruling coalition did not secure a majority in a recent election. This outcome might lessen their power, likely delaying BoJ rate hikes until at least October. Market participants are awaiting US Existing Home Sales data and global PMIs, which could affect JPY demand. Traders should be careful, as more buying could push USD/JPY to 148.00, while selling may drop it to 145.00. The political instability connected to Prime Minister Kishida is a significant factor. Recent polls show his cabinet approval ratings below 30%, raising concerns about his coalition’s weakened power. This uncertainty suggests that any major policy changes will face internal debate, which affects the yen’s stability.

Trading Range and Strategies

The discussed trading range is outdated; USD/JPY has consistently been above 150.00 in recent weeks. This is largely due to the significant interest rate difference between the US and Japan, which has supported the carry trade for over a year. As a result, traders have benefitted from holding long positions in the dollar against the yen. Rather than expecting delayed rate hikes, we anticipate a possible policy shift from the central bank as early as the second quarter. Japan’s core inflation recently fell to 2.3% in January 2024 but has remained above the BoJ’s 2% target for over a year, increasing pressure to end negative interest rates. This situation makes buying put options on USD/JPY an attractive strategy to hedge against or profit from a sudden rise in the yen. On the US side, expectations have changed significantly. Futures markets, including the CME FedWatch Tool, now suggest a high chance of Federal Reserve rate cuts starting mid-year. This shift could narrow the interest rate gap, reducing the dollar’s yield advantage and leading to the unwinding of long positions. Historically, when this interest rate dynamic shifts, the unwinding of the carry trade has resulted in sharp declines in the USD/JPY pair, similar to the rapid drops observed in late 2022. Therefore, derivative traders should consider strategies that take advantage of increased volatility, like long straddles, as the current calm in the market may be misleading. Create your live VT Markets account and start trading now.

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