Today marks Marine Day in Japan, which means that the stock and bond markets are closed. However, yen trading continues in New Zealand, Australia, Singapore, and Hong Kong, although activity is less than usual. In the early morning, trading is very thin from Sydney to Hong Kong, with most activity concentrated in New Zealand. Recent events, especially Japan’s election results, have influenced trading, resulting in a stronger yen. The USD/JPY exchange rate is about 147.85, and the EUR/JPY rate is near 172.10. The ruling LDP coalition had a disappointing showing, winning only 41 seats. This could pose challenges for Prime Minister Ishiba, who may need support from the DPP to form a coalition.

Short Term Reaction In Thin Market

The yen’s initial strength appears to be a typical short-term response to political events in a thin market. The poor performance of the ruling coalition creates uncertainty about Japan’s political leadership and economic policies, leading to potential volatility rather than a new trend for the currency. To navigate these increased price fluctuations, we should consider buying options volatility. One-month implied volatility for USD/JPY has already surged over 20% in early trading, reminiscent of the political chaos in the late 2000s. We anticipate more volatility as serious political negotiations begin this week. Historically, extended political instability in Tokyo has weakened the yen by hindering decisive economic policies. This was evident between 2006 and 2012 when frequent changes in leadership negatively impacted the currency. Therefore, we should be cautious about buying into this initial yen rally and instead look for opportunities to profit from a potential reversal.

Attractive Strategies For Price Moves

In addition to the prime minister, a key figure to watch is the Governor of the Bank of Japan. The central bank will strive to maintain stability, but any suggestion that a new, unstable government might push for policy changes could trigger significant market moves. A recent survey by the Japan Center for Economic Research revealed that over 60% of institutional investors view political instability as the biggest risk to their Japan-related investments for the rest of the year. Given this climate, strategies like long straddles or strangles on yen pairs could be quite appealing, as they benefit from significant price movements in either direction. Potential triggers for sharp price action could include a leadership challenge to the current prime minister or difficult negotiations to form a government with the DPP. We should brace for a turbulent, headline-driven market in the coming weeks. Create your live VT Markets account and start trading now.

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