The USD/JPY has gone up by 0.5% as it approaches the 200-hour moving average. This increase follows reports that a Japanese lawmaker from the ruling LDP has gathered enough support to request a joint meeting of both houses of the National Diet. The purpose of this meeting is unclear, but there are rumors that it could be related to a potential challenge to Ishiba. This political uncertainty has affected market sentiment, causing a drop in the Japanese yen.

Technical Analysis

USD/JPY, which faced downward pressure earlier this week, has bounced back and is close to its 200-hour moving average. If it breaks above this level, it could shift control back to buyers in the short term. Ishiba’s political future seems uncertain, and there are doubts about the ruling coalition’s ability to earn back voter trust. The potential for a broader political movement in Japan adds to the overall uncertainty around the yen. We view the current political situation as a clear indication of ongoing short-term weakness for the yen. The movement of USD/JPY towards its 200-hour moving average shows that traders are selling the yen due to rising uncertainties. This reaction is typical in markets facing possible leadership instability in a significant economy. The cabinet’s approval rating recently hit a record low of 22.2% in a Kyodo News poll, raising the likelihood of a leadership challenge. We suggest buying call options on USD/JPY as a smart way to bet on potential increases while managing downside risks amid this political drama.

Market Strategy

Uncertainty is causing market fluctuations, with implied volatility on the yen rising over 5% in the past week. If you expect a significant price change but aren’t sure in which direction, a long straddle could be a good strategy. This options approach profits from a large move in USD/JPY, whether it goes up or down. We should remember past events, like the frequent leadership changes in the late 2000s. While domestic politics made waves, the yen’s movement was often influenced by global risk sentiment. For example, during the 2008 financial crisis, the yen strengthened significantly as a safe-haven asset despite Japan’s political instability. In the end, the political drama distracts from the main issue: the significant interest rate gap between the U.S. and Japan, which is over 5 percentage points. This ongoing fundamental pressure continues to negatively impact the yen, making any rally driven by politics a potential selling opportunity. We believe the yen is likely to trend downwards until the Bank of Japan indicates a major policy change. Create your live VT Markets account and start trading now.

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