The Japanese Yen (JPY) is weakening against the US Dollar (USD), trading at about 152.80. This marks the sixth straight day of gains for the USD. After a short decline caused by softer US Consumer Price Index (CPI) data, the US Dollar rebounded thanks to strong business activity data.

US Economic Activity

In October, the S&P Global Flash Composite Purchasing Managers Index (PMI) rose to 54.8 from 53.9 in September, indicating the fastest growth in the private sector in three months. The Services PMI also increased to 55.2 from 54.2, while the Manufacturing PMI went up to 52.2 from 52. This shows strength across various sectors. Consumer sentiment, however, has weakened. The University of Michigan survey revealed a drop in the headline index to 53.6 in October from 55.1 in September. Inflation expectations were mixed, with a one-year outlook remaining at 4.6% and a five-year measure rising to 3.9% from 3.7%. US CPI data indicated a 0.3% month-on-month rise in September, which was below the 0.4% forecast. This softer inflation led to expectations that the Federal Reserve would maintain a gradual easing approach, with potential rate cuts discussed for the monetary policy meeting on October 29-30. In Japan, the Yen continued to weaken despite domestic inflation increasing to 2.9% in September from 2.7% in August. There are growing speculations that Prime Minister Sanae Takaichi may announce a stimulus package next month. Finance Minister Katayama suggested that the government might issue more bonds if needed. The JPY showed mixed results against major currencies. A heat map displayed the percentage changes, using base currencies from the left column and quote currencies from the top row. The Yen performed best against the Canadian Dollar.

Outlook and Strategy

The gap between US economic strength and Japanese policy is widening, suggesting that USD/JPY could continue to rise. Even with an expected Federal Reserve rate cut next week, the strong US PMI reading of 54.8 indicates that the American economy remains robust. This strength is likely to keep the US dollar strong against a fundamentally weak Japanese yen. Given this outlook, buying USD/JPY call options seems like a smart strategy for the upcoming weeks. This allows investors to benefit from potential gains towards multi-decade highs while limiting risk to the premium paid. We’re considering strike prices above 153.00, expecting a breakout from the recent range. We should stay alert to the risk of intervention from Japanese authorities, especially since we are trading at levels not seen since the significant interventions in 2022 and 2024. However, with Japan’s government planning a new stimulus package that likely requires more debt, the justification for aggressively defending the yen is weaker this time. This internal policy conflict in Japan gives us more confidence that the upward trend can continue. The market has largely anticipated the Fed’s gradual easing started after the aggressive rate hikes that peaked above 5% in 2024. The softer-than-expected US inflation data, which sits at 3.0%, confirms that the Fed can continue its planned cuts without causing concern. The focus has shifted from inflation to relative economic strength, where the US currently has the advantage. On the Japanese side, normally rising domestic inflation at 2.9% would strengthen the yen. However, the government’s plan for increased fiscal spending undermines prospects for monetary tightening from the Bank of Japan. This situation reinforces the yen’s role as a funding currency, and we expect this trend to persist through the end of the year. Create your live VT Markets account and start trading now.

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