The Japanese Yen is losing ground as risk appetite grows following Trump’s more lenient approach to China. Trump has indicated that the 100% tariffs on Chinese imports are “not sustainable” and plans to meet with Xi at the APEC Summit in South Korea. As a result, the USD/JPY pair is rising, buoyed by increased demand for the US Dollar. The pair has bounced back after reaching a two-week low in the Asian session, showing stability for the US Dollar overall.

USD/JPY Trading Dynamics

Currently, USD/JPY is around 150.38, recovering from a dip to nearly 149.38. This uptrend reflects a boost in demand for the US Dollar, driven by a shift away from defensive trading positions as the weekend approaches. Trump’s remarks indicate a departure from strict trade policies, especially with the confirmed meeting with Xi Jinping. At the same time, markets are anticipating consecutive rate cuts from the Federal Reserve in October and December. St. Louis President Alberto Musalem recommends a balanced strategy, noting limited room for rate reductions before monetary policy becomes too accommodative. Meanwhile, Bank of Japan Governor Kazuo Ueda highlights the need for more data before making any adjustments. Current OIS pricing suggests a 10-20% chance of a rate hike in October, with most leaning toward steady rates. A Reuters poll shows that Japan’s core CPI is likely to rise to 2.9% year-over-year in September, up from 2.7% in August.

Market Opportunities and Risks

The improved risk sentiment, fueled by the softer US-China trade outlook, is pushing USD/JPY toward the 150.50 level. However, we view this as a short-term boost for the dollar, as markets turn their attention to upcoming US data. The CME FedWatch tool indicates that two rate cuts of 25 basis points are fully expected through the end of 2025, which may limit the dollar’s strength. Recent data supports the case for the Federal Reserve to ease rates, making aggressive long USD positions potentially risky. The September jobs report showed a modest addition of 155,000 new jobs, while core CPI cooled to 3.6% year-over-year. These figures could give Fed officials, including Musalem, justification for a rate cut in October. On the other hand, the Bank of Japan remains cautious, and Governor Ueda is likely to keep rates steady despite Japan’s core inflation nearing 2.9%. We also recall the Ministry of Finance’s interventions in 2022 and 2024 when the dollar-yen pair hit the 150-152 range, creating a significant risk for similar actions now, which could limit potential gains. This situation suggests that options could be useful for trading anticipated volatility in the coming weeks. A long straddle, which involves purchasing both a call and a put option with the same strike price around 150.50, could be effective. This strategy allows for profit from significant price movements in either direction, whether driven by a dovish Fed or unexpected intervention from Japan. The decrease in trade tensions has also led to lower implied volatility, making options less expensive to buy right now. This presents an opportunity to prepare for potential spikes in volatility ahead of the Fed’s October 30th decision and the APEC summit in November. The current calm in the market is likely to be temporary with these major events approaching. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now