The USD/JPY pair has dropped to around 153.05 during early trading in Asia on Friday. The US Dollar is facing selling pressure due to the ongoing government shutdown, which started on October 1. Congress has not yet reached an agreement on funding. In October, US companies reported over 150,000 job cuts, marking the highest number for that month in over 20 years. The potential for an interest rate cut by the Federal Reserve in December, along with the recent hawkish minutes from the Bank of Japan’s September meeting, could affect currency movements.

Bank Of Japan Policy Influence

The Bank of Japan’s approach to interest rates is crucial for the Japanese Yen’s value. Uncertainty about when to change policies might weaken the Yen, even with recent conditions favoring interest rate hikes by the Bank of Japan. As a safe-haven currency, the Yen tends to strengthen during periods of market stress, offering stability against riskier investments. However, long-term differences in policies between the Bank of Japan and other central banks have historically influenced the Yen’s value. Changes in the yield gap between US and Japanese bonds could also affect future currency trends. With the USD/JPY moving towards 153.00, there are chances to position for further declines in the weeks ahead. The ongoing government shutdown in the US has now lasted 38 days, surpassing the 35-day shutdown of 2018-2019. This prolonged uncertainty is unsettling economic confidence and creating significant challenges for the US Dollar.

Implications For Traders

The US jobs report, which revealed a loss of over 150,000 private sector jobs, indicates a slowing economy. This finding greatly changes expectations for the Federal Reserve’s policies. Fed funds futures now show an 85% chance of a 25-basis-point interest rate cut in December. This situation makes holding long positions in USD riskier against the Yen. On the other side, the Bank of Japan’s aggressive stance from its September minutes hints that a policy shift is coming. This has lifted the yield on 10-year Japanese Government Bonds above 1.0% for the first time in over a decade, reducing the yield gap with US Treasuries. This fundamental change is likely to strengthen the Yen, reversing its decline since 2022. For derivative traders, this scenario favors strategies that profit from a declining USD/JPY exchange rate. Buying put options on USD/JPY allows traders to speculate on further drops while managing risk. Given the high uncertainty in the market, implied volatility is on the rise, which traders should consider when pricing any options strategy. The Yen is also regaining its safe-haven appeal as worries grow about the US economy and its political instability. We saw a similar movement towards safe assets during the banking crisis earlier in 2023, which briefly strengthened the Yen. If the US shutdown continues, more investors may seek the safety of the Japanese currency. Create your live VT Markets account and start trading now.

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