Barclays analysts see possible support for the yen due to the US-Japan trade deal. Bank of Japan Deputy Governor Uchida mentioned that uncertainties are decreasing, suggesting a faster timetable for rate hikes. With lower tariff worries and a quicker rate increase from the Bank of Japan, the yen could strengthen soon. It has been rising since Monday, boosted by election updates.

Yen Set for a Strong Rally

We believe the yen is ready for a long-term increase, fueled by a resolution of trade issues with the US and signs of tighter monetary policy. Uchida’s remarks hint at a significant change for the central bank, which has kept a loose policy for years. This sets the stage for a stronger yen in the near future. The market is already responding: the USD/JPY exchange rate has fallen below 155 from highs above 157 just last week. This shift is supported by strong fundamentals, as Japan’s core inflation has stayed above the central bank’s 2% goal for over two years and was recently reported at 2.2%. Ongoing inflation backs up the policy shift hinted at in his comments.

Changing Outlook for the US Dollar

This trend is also shaped by a new outlook for the US dollar. Recent US inflation data shows signs of easing, prompting markets to expect potential Federal Reserve rate cuts by the end of the year. This difference in policy—an increasingly hawkish Bank of Japan compared to a dovish Fed—often results in a weaker dollar against the yen. For those trading derivatives, this is a signal to prepare for further yen strength. Data from the CFTC’s Commitments of Traders report indicates that large speculators have held substantial net short positions against the yen for months. A lasting rally could lead to these positions being unwound, causing a short squeeze that would speed up the yen’s appreciation. Thus, we recommend strategies like buying USD/JPY put options or taking long positions in yen futures. This approach allows for potential gains while managing risks, which is essential as volatility is expected to rise. A similar situation occurred in late 2023 when the central bank made minor adjustments to its yield curve control policy, showing the market’s sensitivity to even small moves toward normalization. Create your live VT Markets account and start trading now.

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