USD/JPY rose to about 151.90 in the early Asian session on Wednesday. This increase follows the historic election of Sanae Takaichi as Japan’s first female prime minister. Takaichi’s win resulted from a partnership between the ruling Liberal Democratic Party and the Japan Innovation Party. Her support for fiscal stimulus makes it harder for the Bank of Japan to raise interest rates.

Impact On Yen

The Bank of Japan may delay interest rate hikes, which could further weaken the Yen. This situation benefits the USD/JPY pair in the short term. At the same time, the US government shutdown has reached its fourth week after the Senate failed to pass funding for the 11th time. This shutdown is now the third-longest in modern US history. The uncertainty from the ongoing US shutdown and delayed economic data, like Nonfarm Payrolls, is impacting financial markets and the Federal Reserve’s choices. Traders might expect an interest rate cut, which can weaken the US Dollar. The Japanese Yen is greatly affected by the Bank of Japan’s policies and the yield differences between US and Japanese bonds. It’s also a safe-haven currency, attracting traders during times of market stress.

Strategies And Implications

As USD/JPY approaches the 152.00 mark, we see a battle between opposing forces. A dovish Prime Minister in Japan suggests a continued loose monetary policy, which may weaken the Yen. However, the risk of Japanese authorities intervening to strengthen their currency is very high right now. We recall that when the pair surpassed 151 in October 2022, the Bank of Japan spent a record ¥9.2 trillion to support the Yen. Given this history, purchasing USD/JPY put options can be a smart way to protect against sudden downturns. This strategy allows for potential gains while limiting losses if there’s a sharp drop due to intervention. Conversely, the extended US government shutdown brings significant uncertainty for the dollar. This has caused the volatility in one-month USD/JPY options to increase, recently rising above 12% compared to the year-to-date average of around 8.5%. A long straddle strategy, which involves buying both a call and a put option, could effectively capitalize on this uncertainty and benefit from large price swings in either direction. The interest rate gap between US and Japanese 10-year bonds, sitting around 380 basis points, remains a key factor. While Japan’s new leadership suggests this gap will stay wide, a prolonged US shutdown could harm the American economy and push US yields lower. We’re keeping a close watch on this spread since a consistent narrowing might signal a peak in the currency pair. Create your live VT Markets account and start trading now.

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