USD/JPY was directionless on Thursday, hovering near 160.50 even as the US Dollar firmed, with traders wary that Tokyo could step in again after late-April action at similar levels. Japanese officials have reiterated their readiness to respond to excessive and disorderly moves, which has limited upside in the pair despite a stronger Greenback.
Geopolitical tension between the US and Iran has supported the Dollar, after Washington warned of further strikes following Tehran’s downing of a US Apache helicopter near the Strait of Hormuz. Even so, Reuters reported that the two sides are still exchanging messages over a memorandum of understanding, including arrangements to release frozen Iranian funds. The Dollar Index (DXY) was around 100.23, its highest since 6 April, while inflation data reinforced hawkish Federal Reserve expectations: May PPI rose 6.5% year on year versus 5.7% in April and above the 6.4% consensus, and CPI increased to 4.2% from 3.8%. Core PPI held at 4.9% against a 5.4% forecast, while core CPI ticked up to 2.9% from 2.8%. Higher oil prices and the BoJ’s gradual normalisation stance continued to weigh on the yen.
Yen Intervention Risks and Elevated Volatility
With USD/JPY pinned near the 160.50 level, we see a clear standoff between a strong dollar and the threat of intervention. We recall that the Ministry of Finance spent over $60 billion in the autumn of 2022 to defend the yen, so their current warnings must be taken seriously. This makes outright long positions risky until we see a clear breakout.
Given the tension between geopolitical safe-haven flows and intervention threats, we expect volatility to rise significantly. The CME’s CVOL index for JPY/USD futures has already climbed to a 12-month high, signaling market nervousness. Therefore, we believe long volatility strategies, such as buying straddles, could be profitable to capture a sharp move in either direction.
US Inflation, Energy Costs, and Bullish Strategies
The US inflation picture supports a stronger dollar, making it difficult to bet against the pair. With the latest CPI data showing inflation at 4.2%, the CME FedWatch Tool is now pricing in an 85% probability of another 25-basis-point rate hike in July. This keeps upward pressure on the dollar and the US-Japan interest rate differential.
At the same time, elevated energy costs are a direct negative for the yen. With WTI crude holding above $110 a barrel due to the Middle East tensions, Japan’s import costs will continue to weigh on its currency. This fundamental weakness makes it hard for the yen to gain any lasting strength on its own.
In the coming weeks, we are structuring trades that have a defined risk profile. We are looking at bullish strategies like call spreads, for example buying a 161.00 call while selling a 163.00 call. This allows us to profit from a potential upward drift while capping our maximum loss if Japanese officials suddenly decide to act.
