The Japanese Yen has risen slightly by 0.1% against the US Dollar after a new trade agreement between the US and Japan. This increase occurs despite ongoing political doubts about Japanese Prime Minister Ishiba, which have been denied yet still impact market feelings. The US will impose a 15% tariff on some imports from Japan, while Japan is likely to ease safety rules for US vehicle imports. Higher Japanese yields contribute to narrowing yield spreads, indicating that the Bank of Japan might start tightening its monetary policy again after stopping due to earlier uncertainties.

Currency Market Movements

In the currency market, the EUR/USD has dropped back to the low-1.1700s after some gains, while GBP/USD remains strong above 1.3500. Both currencies are reacting to the US-Japan trade deal. Gold is seeing small losses but still stays above $3,400 per troy ounce, even with selling pressure and a stronger US Dollar. In the crypto market, major cryptocurrencies like Bitcoin and Ethereum are declining, with total market capitalization down by 3.5%, indicating possible profit-taking. Considering the yen’s modest rise, traders should be careful about betting against it. Japan’s Ministry of Finance has spent a record ¥9.8 trillion (around $62 billion) to support the yen, showing little tolerance for more weakness. This strong approach suggests that strategies like buying puts on USD/JPY could be wise for protecting against sudden increases driven by policy changes. The focus on narrowing yield spreads is important for our strategy. A tighter spread between U.S. and Japanese government bonds historically leads to stronger yen, making it more appealing to hold. We are preparing for a potential shift in the central bank’s stance, which could speed up this trend and put downward pressure on the dollar-yen pair.

European Currencies and the Dollar

The dollar’s impact on European currencies calls for a two-pronged approach from us. With the European Central Bank lowering interest rates in early June 2024, we see limited growth for the euro, making any upticks a chance to short. For the pound, we expect more volatility, making strategies like straddles attractive to take advantage of large price movements without committing to a direction. Despite a recovering dollar, we view the dips in gold as buying chances, likely using call options to reduce risk. Central banks have strongly supported gold by purchasing over 1,000 tonnes in 2023, which helps shield it from speculative selling. This high demand from institutions suggests a strong price floor. The recent drop in cryptocurrencies indicates a “risk-off” trend that shouldn’t be overlooked. After Bitcoin hit an all-time high above $73,000 in March, recent data shows net outflows from new spot Bitcoin ETFs, confirming profit-taking. We recommend lowering leverage on crypto positions or buying protective puts until the market shows signs of stabilizing. Create your live VT Markets account and start trading now.

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