The USD/JPY pair is trading around 152.05 early on Monday in the Asian session. This comes after a recovery from earlier selling due to US tariff threats against China. China has warned it will retaliate if the US enacts 100% tariffs, raising worries about the trade war’s effects.

Trade Tensions Affecting USD/JPY

Traders are looking forward to China’s Trade Balance data due later today. Ongoing US trade tensions and concerns about a government shutdown could sway the US Dollar against the JPY in the short term. Traders are closely watching the reopening of the US federal government. If the Bank of Japan (BoJ) doesn’t raise interest rates, it could weaken the JPY. However, verbal warnings from officials, like the Japanese Finance Minister, about exchange rate volatility could help prevent a steep decline. The JPY’s value is influenced by various factors, including Japan’s economy, BoJ policies, differences in bond yields between Japan and the US, and traders’ feelings about the market. Historically, the BoJ has intervened to manage the Yen’s value, particularly when its policies diverge from those of other central banks. Recently, the BoJ’s move to ease its ultra-loose policies has supported the Yen. The JPY is often seen as a safe-haven asset that tends to gain value when market conditions are shaky. With USD/JPY around the 152.00 mark, we see a tug-of-war between two opposing forces, creating uncertainty. The possible new US tariffs on China usually foster “risk-off” sentiment, which strengthens the Yen. Yet, a possibly softer stance from the BoJ pulls the JPY down. The Cboe/CME FX Yen Volatility Index (JYVIX) has jumped to 12.5%, indicating that traders are expecting larger price swings.

Strategy for USD/JPY Volatility

The risk of Japanese officials intervening to boost the Yen is high at these levels, which may limit further increases for now. Remember that the Ministry of Finance stepped in with significant yen-buying operations in late 2022 when the pair last reached the 150-152 range. A strategy for now could involve selling out-of-the-money call options or using bear call spreads above 153.50 to collect premiums while betting that this upper limit will hold. Meanwhile, escalating trade tensions from the US pose a risk to the dollar. Looking back at the 2018-2019 trade disputes, the Yen often strengthened during high-stress periods as investors sought safety. With the VIX closing above 19 last week for the first time in months, buying put options on USD/JPY could hedge against or profit from a sharp decline if fears of a trade war escalate. Given the possibility of a strong breakout in either direction, the current volatility suggests that options strategies aiming to profit from significant market moves are a wise choice. This market environment makes buying both call and put options, known as a long straddle, an appealing strategy in the coming weeks. While rising volatility raises option prices, it also signals that traders are preparing for a significant move, making this strategy potentially profitable. Create your live VT Markets account and start trading now.

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