Based on the current situation, we see a chance to sell when the Nikkei 225 rises. While the trade deal is good news for now, uncertainty from Prime Minister Ishiba’s likely resignation and high metal tariffs may limit future gains. We plan to sell out-of-the-money call options on the index to take advantage of any cooling optimism.

Revival Of The Carry Trade

The recent fluctuations in the yen signal a possible return of the carry trade. The difference in interest rates between the Bank of Japan, which has a near-zero policy rate, and other central banks is historically wide. This makes borrowing yen cheap and investing in other currencies appealing. We intend to buy call options on USD/JPY, expecting that lasting policy differences will outweigh any short-lived positive feelings from the trade deal. There is a noticeable gap between Japanese and American car makers, creating a perfect opportunity for a pairs trade. The terms of the trade deal favor Japanese exporters while hurting U.S. companies, who still deal with high production costs. Our strategy is to buy call options on leading Japanese auto manufacturers while purchasing put options on major U.S. automakers at the same time. Deputy Governor Uchida’s cautious remarks suggest that the Bank of Japan is slow to change its policy, adding to the uncertainty. Historically, delays from central banks amid political unrest lead to increased market volatility, which we think is not being fully priced in right now. We see opportunity in buying long straddles on the yen, which will benefit from significant price movements in either direction.

Federal Reserve Rate Cuts And Short Yen Positions

Additionally, the expectation of three Federal Reserve rate cuts this year complicates a straightforward long-dollar strategy. Nevertheless, the yen has recently dropped to multi-decade lows against the dollar, mainly because its central bank has been much less active compared to others worldwide. We believe this situation will continue, making short-yen positions versus currencies other than the dollar an attractive option. Create your live VT Markets account and start trading now.

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