Nomura’s Global Markets Research team believes that recent dovish comments from Fed Chair Jerome Powell may weaken the dollar against the yen. These remarks suggest a higher chance of a rate cut in September, indicating that the USD could face pressure in the near future. The team stands firm on a short USD/JPY trade, targeting 142.00 by the end of October. They will also watch for updates from Bank of Japan officials like policy board member Junko Nakagawa, who may hint at potential rate hikes that could further boost the yen.

Market Reaction to Fed Chair Comments

After last Friday’s dovish statements from the Fed chair, we are more confident in our short USD/JPY position. Markets now see over a 70% chance of a rate cut in September, according to CME Group data, which supports our belief that the dollar will be under pressure. This change in policy outlook is a clear driver for a lower exchange rate. We still aim for 142.00 by the end of October. This target reflects a significant drop from the highs of late 2023 and 2024 but remains achievable given the shifting policies of central banks. We view this as a move back to a more balanced valuation as interest rate differences narrow. For derivative traders, purchasing USD/JPY put options that expire in October or November is a practical way to capitalize on this trend. This strategy offers a defined-risk approach to target the 142 level. Since the Fed’s announcement, implied volatility has decreased slightly, making option premiums more appealing than earlier in the month.

Focus Shifting to Bank of Japan

Now, focus is turning to the Bank of Japan. A key speech from a policy board member is set for this Thursday. With Japan’s core inflation consistently above 2.5% through mid-2025, any hint of a rate hike before the year ends could significantly strengthen the yen, creating another strong reason to support this trade. Traders seeking a more cost-effective method might consider a bear put spread, like buying a 145-strike put and selling a 142-strike put. This strategy lowers the upfront premium for the position. While it caps the maximum profit at our 142 target, it provides a more efficient way to express the outlook. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now