US Treasury Secretary Scott Bessent highlighted that a successful trade deal with Japan is still possible. He stressed the need for a careful agreement instead of rushing into one. Right now, negotiations show that no final deal has been reached. The results of the upcoming Japanese election are seen as crucial for any potential agreement.

Focus on USD/JPY and Nikkei 225

Bessent’s comments suggest that the timeline for a trade deal is uncertain and may take longer than expected. In this situation, it’s wise to prepare for ongoing volatility rather than betting on a specific outcome. Derivative traders should concentrate on the USD/JPY currency pair and the Nikkei 225 index in the coming weeks. With no rush for a deal, we expect the USD/JPY to react dramatically to any news, whether good or bad. We recommend buying straddles or strangles on this currency pair since one-month implied volatility has risen to 8.7%, indicating market anxiety. This strategy will benefit from significant price changes in either direction, taking advantage of the risks that Bessent mentioned. The Japanese election’s significance is essential for our timing. Prime Minister Fumio Kishida’s approval ratings recently dropped to a record low of 21% in a Jiji Press poll, making the political situation unstable. We think this instability may lead to stalled negotiations, which could strengthen the yen as investors seek safer options.

Opportunities in Derivatives

Historically, the Nikkei 225 has shown large movements during crucial trade talks, like the TPP negotiations, where daily changes of 2-3% happened based on rumors alone. Therefore, we should consider using options to protect long-term Japanese equity investments from a sharp decline if talks seem to fall apart. This approach safeguards capital while we await a clear direction. In addition to the main indices, there are opportunities in sector-specific derivatives. Japan’s Ministry of Finance data confirms that automobiles are a top export. We could buy put options on major Japanese car manufacturers as protection against potential tariffs. On the other hand, if negotiations go well, call options on US agricultural companies could be appealing, as Japan is the third-largest export market for American farm products, valued at over $13 billion last year. Create your live VT Markets account and start trading now.

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