Gold surged above US$3,500 but later dropped slightly below that mark. This increase was fueled by investors seeking safety and expectations that the Federal Reserve might soon lower interest rates. The US dollar gained strength, causing the yen to weaken. The USD/JPY exchange rate surpassed 147.70. The Deputy Governor of the Bank of Japan noted that raising rates might be necessary, although the timing is unclear. Moreover, Japan’s trade negotiator rejected US calls for lower agricultural tariffs and urged reductions in auto levies. In the stock market, Asia-Pacific indexes showed mixed performance. Japan’s Nikkei 225 climbed by 0.25%, while Hong Kong’s Hang Seng rose by 0.1%. However, the Shanghai Composite dropped by 0.4%, and Australia’s S&P/ASX 200 slipped by 0.2%. Traders are also getting ready for an announcement from Trump at 2 pm US Eastern time. Gold breaking the $3,500 mark suggests strong demand for safe-haven assets, a trend that has grown since the US GDP fell in the second quarter of 2025. With August inflation cooling off to 2.8%, many expect the Federal Reserve to cut rates in the fourth quarter. Traders in derivatives might consider buying long-dated call options on gold ETFs to take advantage of this easing cycle. The yen’s decline past the 147 level against the dollar creates a good opportunity for carry trades, thanks to the large interest rate gap that has existed since late 2024. The Bank of Japan’s unclear timeline for rate hikes implies that the yen may continue to weaken for now. Traders might look to sell out-of-the-money JPY call options to earn premiums while betting that the BoJ will remain inactive for another quarter. Trump’s upcoming announcement poses significant event risk, particularly regarding auto tariffs that could affect Japan and the wider Asian markets. We advise traders to brace for increased volatility, as the VIX index has risen from 18 to 22 this past week due to uncertainty. This environment favors buying volatility through straddles on the S&P 500 or the USD/JPY pair instead of taking a clear directional stance. The differences in Asian stock markets, with Japan’s Nikkei rising while Shanghai declines, highlight a split in sentiment after last week’s data showed Chinese industrial production at a two-year low. The weaker yen is beneficial for Japanese exporters, a trend we’ve seen continue throughout 2025. A potential strategy could involve going long on Nikkei 225 futures while shorting Hang Seng futures to benefit from Japan’s currency strength amidst regional trade concerns.

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