Japan’s recent two-year bond auction saw the lowest demand since 2009. The bid-to-cover ratio hit a 15-year low. Moreover, the auction produced the largest tail since 2023. This outcome shows weak interest in short-term Japanese Government Bonds.

Expected Rate Hike Impact

The poor performance of this auction suggests that the market believes the Bank of Japan (BoJ) will raise interest rates sooner than we expected. Investors are hesitant to buy short-term bonds at current rates because they anticipate better returns soon. This belief supports our view that the era of very low rates is coming to an end. To adapt, we should prepare for a stronger yen since higher rates will attract investment. The yen has been around the 165 mark against the dollar for most of August 2025, but this auction hints at a possible change. Buying call options on the JPY or put options on the USD/JPY pair could be a smart move in the coming weeks. In the rates market, we might want to consider paying fixed on Japanese yen interest rate swaps to bet on rising short-term rates. Data from the Tokyo Financial Exchange shows that open interest in three-month Euroyen futures has increased by 12% since July 2025, indicating that more traders are hedging or speculating on a rate rise. Shorting Japanese Government Bond (JGB) futures is another way to take action.

Expected Market Volatility

This uncertainty in policy is likely to result in increased market volatility. Looking back to March 2024 when the BoJ ended its negative interest rate policy, the Nikkei Volatility Index rose over 25% in the following quarter. We can expect something similar, making long volatility positions through straddles on the Nikkei 225 index an appealing strategy. Higher borrowing costs will put pressure on Japanese stocks, especially in rate-sensitive sectors. Recent earnings from Q2 2025 already showed Japanese real estate companies facing tighter margins, a trend that is likely to continue. We should think about buying protective puts on the Nikkei 225 or specific sector ETFs to safeguard against a potential decline. Create your live VT Markets account and start trading now.

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Nvidia’s shares declined due to weaker guidance and the absence of sales forecasts for China, which is impacting US equity futures. In fiscal Q2, Nvidia reported revenue of $46.7 billion, exceeding expectations. However, its guidance for Q3 at around $54 billion did not meet some forecasts. Concerns about H20 chip sales in China were raised, but there could be positive developments if approvals are granted. Nvidia also announced share buybacks due to strong AI demand. In Japan, tariff negotiator Akazawa canceled a trip to the US to focus on domestic matters. BOJ board member Nakagawa highlighted trade risks and stressed the significance of the Tankan survey for evaluating these impacts. The USD/JPY currency pair traded within a narrow range, while major currencies slightly weakened against the dollar.

Capital Expenditures and Interest Rates

In Australia, Q2 capital expenditures rose by 0.2%, below the anticipated 0.7%. The Bank of Korea kept its base rate steady at 2.5%. China held productive trade talks in Canada and aimed to increase AI chip production. Business confidence in New Zealand showed a slight uptick, but UK services confidence fell, with the CBI warning about costs and weak demand. Japan’s Nikkei 225 index increased by 0.7%, whereas Hong Kong’s Hang Seng index dropped by 0.6%. The Shanghai Composite rose by 0.1%, and Australia’s S&P/ASX 200 also inched up by 0.1%. Nvidia’s results indicate that the AI-driven market surge is losing steam, despite the overall positive numbers. The market’s negative reaction to guidance that wasn’t stunning signals that expectations have become too high. It may be wise to buy September or October put options on the Nasdaq 100 (QQQ) to safeguard against a wider tech sector decline.

Opportunities in Volatility Products

The instability surrounding the market’s top leader offers a chance to utilize volatility products. The CBOE Volatility Index (VIX) has remained low, recently trading below 16, especially amidst increasing macroeconomic concerns. Purchasing VIX call options or futures could be a smart way to hedge against the complacency observed over the summer. We have seen this before, where a few major tech stocks drive the market, similar to late 2021 before the downturn in 2022. The fact that Nvidia’s strong results failed to lift futures is a concerning sign. It suggests that the easy profits in the AI sector may already be realized, making it a good time to protect gains by selling out-of-the-money call spreads on top tech stocks. The ongoing trade disputes are no longer mere background noise; they are clearly expanding beyond the US and China. The World Trade Organization has reported a mere 0.9% growth in global merchandise trade volumes during the first half of 2025, citing these tensions. This situation supports a stronger U.S. dollar, making long positions in the dollar index (DXY) against a mix of trade-sensitive currencies appealing. In the currency market, the Bank of Japan’s explicit warning about tariffs while USD/JPY hovers around 147.50 is particularly significant. We’ve seen major Japanese government intervention to support the yen back in 2022 when the dollar surpassed 145. The current lack of action from the BOJ, combined with geopolitical risks, suggests a potential sharp move in the market. This makes strategies like a long straddle on USD/JPY a viable option to capitalize on the increasing likelihood of a breakout. Create your live VT Markets account and start trading now.

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Tariff uncertainty and the upcoming Tankan survey could affect yen stability, but the possibility of a Bank of Japan (BOJ) rate hike this year supports the Japanese currency. BOJ board member Junko Nakagawa warned about the risks linked to U.S. tariff policies and highlighted the importance of the Tankan survey in measuring corporate sentiment amid trade tensions.

BOJ’s Data-Driven Approach

Nakagawa stressed that the BOJ is focused on data and will adjust monetary policy when necessary. With experience leading Nomura Asset Management, she takes a balanced view on policy. Last year, the BOJ ended its extensive stimulus program and raised rates to 0.5% in January, targeting a 2% inflation rate. In July, the bank kept its position but raised its inflation forecasts and expressed optimism about growth, maintaining expectations for another rate hike this year. Many analysts expect at least a 0.25% rate increase before the year ends. This expectation has grown since July. Nakagawa noted there is still significant uncertainty regarding how tariffs will impact the economy. Currently, the yen is experiencing a back-and-forth battle. Expectations for another BOJ rate hike provide some support, but the threat of U.S. tariffs, especially on the auto sector, limits the yen’s potential strength. This creates a cautious environment for derivative trading in the weeks ahead.

Tankan Survey and Yen Outlook

All attention is on the upcoming Q3 Tankan survey, which is essential for measuring business confidence. In the past, a surprisingly weak Tankan survey in the first quarter of 2024 delayed the BOJ’s initial efforts to normalize policy. If we see a similar weak reading now, it could significantly push back the next expected rate hike, leading to a sharp sell-off in the yen. This scenario makes long-dated JPY put options a potentially useful hedge. Given this uncertainty, the implied volatility on USD/JPY options has been rising, recently reaching levels reminiscent of the policy shift in January 2025. Traders might find it wiser to adopt strategies that benefit from price fluctuations rather than betting on a specific direction. Long straddles or strangles could capture a breakout if the tariff news or Tankan survey surprises the market. The BOJ’s data-driven approach means the next inflation report is also critical. Last month’s core CPI was 2.1%, slightly above the BOJ’s 2% target. However, if it drops below that level, it could reinforce a negative Tankan signal. This would likely delay a rate hike until 2026, causing a significant re-evaluation of JPY interest rate swaps. Create your live VT Markets account and start trading now.

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Governor Waller’s Speech

Federal Reserve Board Governor Christopher Waller will share his economic outlook at an event in Miami. The presentation is set for Thursday, August 28, 2025, at 6:00 PM US Eastern time or 10:00 PM GMT. This event comes after Waller’s attempts to secure the Fed Chair position. It gives him a chance to discuss important economic issues in the current financial climate. Governor Waller’s speech is crucial because his potential bid for the Fed Chair could create uncertainty in monetary policy. We are curious to see if his economic outlook shifts from his usual hawkish view to a more favorable growth stance. This possible change is stirring tensions in the interest rate futures market. Recent economic data supports his arguments in both directions. The July 2025 CPI report showed that core inflation remains stubbornly high at 3.1%, above the Fed’s target. However, the latest employment numbers revealed slower job growth at 175,000, which could justify a more cautious approach. Currently, the derivatives market indicates a 60% chance of a 25 basis point rate cut by the December 2025 FOMC meeting. Waller’s comments tonight could either confirm these expectations and boost the markets or dampen them, leading to a sell-off. His tone is more crucial than the specific data he references.

Market Implications

With the VIX at a relatively low 14, we think buying short-term options is wise. A straddle on the S&P 500, which benefits from significant price movements in either direction, is a smart way to trade the uncertainty around the speech. We expect implied volatility to rise before his speech and to drop sharply afterward. We’ve seen similar situations before. For instance, when Chairman Powell changed his hawkish stance in late 2018 due to political pressure, it triggered a major market rally in 2019. A similar signal from a known hawk like Waller could ignite a strong response in risk assets. History shows that a perceived change in the Fed’s position can be more influential than economic data itself. In the coming weeks, we will monitor how markets react to his speech and whether other Fed members share his views. A dovish signal would lead us to position for a year-end rally by buying call spreads on major indices. If he stays firmly hawkish, we would consider purchasing puts for protection against a market that might adjust to a “higher for longer” interest rate scenario. Create your live VT Markets account and start trading now.

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Bank of Japan board member Nakagawa has voiced concerns about how uncertain tariffs might affect the economy. If the outlook for economic activity and prices stabilizes, the BOJ might raise interest rates. Uncertainty around trade policies could influence global business and household trust, impacting Japan and other countries. The results of the September Tankan survey will be crucial for understanding any changes in trade policies.

Impact on Wage-Price Dynamics

Companies that focus on cutting costs may struggle to pass rising costs onto consumers, which could disrupt wage-price dynamics. Japan’s economy is seeing moderate recovery, but challenges remain. There are still many uncertainties about economic activity and price forecasts. Attention is shifting to how companies will react, especially regarding wages and prices. The Tankan survey is an essential tool for the BOJ to assess the health of Japanese businesses. Covering around 10,000 firms, the survey includes data on business conditions, investment plans, and employment information. This survey helps shape policy decisions and is a key economic indicator, released after the quarter it surveys. The September 2025 Tankan report is expected to come out at the end of September or early October 2025.

Global Trade Policies

The Bank of Japan is hinting that it may raise interest rates, but concerns about global trade policies are causing hesitation. This indecision is creating a holding pattern in the USD/JPY exchange rate, setting the stage for a potential sharp move next month. Traders should focus on strategies that could benefit from significant price swings rather than predicting a specific direction. Given this uncertainty, buying volatility seems wise as we approach late September. Traders could consider using options like straddles or strangles on the Yen, which would profit from a significant price movement in either direction following the Tankan survey results. This strategy takes advantage of the market’s current uncertainty without committing to a specific outcome. Expectations for a stronger Yen and a BOJ rate hike are supported by robust wage growth earlier this year. The spring 2025 “shunto” wage negotiations led to an average pay increase of 5.1%, the highest in over thirty years. This suggests that upward pressure on wages might finally lead to sustainable inflation. However, there are signs of weakness that might keep the BOJ from acting, potentially weakening the Yen. The latest core Consumer Price Index for July 2025 registered at 2.4%, which, while above target, showed a slight decrease compared to earlier months. This aligns with the June 2025 Tankan survey, where confidence among large manufacturers dipped, signaling wavering business sentiment. As we near the Tankan release date around September 30, we can expect implied volatility in Yen options to rise. Positioning for a breakout in the coming weeks while volatility is still relatively low could be more cost-effective. The market is keenly awaiting this critical data point to resolve current uncertainties. This sentiment will also affect the Nikkei 225 index. A surprisingly weak Tankan report could hurt business investment and stock prices, making protective put options on the index a worthwhile hedge. On the other hand, a strong report could trigger a market rally, but for now, the primary focus remains on currency markets. Create your live VT Markets account and start trading now.

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Australian Private Capital Expenditure for the April to June quarter of 2025 showed a modest increase of 0.2% from the previous quarter. While this is an improvement from a 0.1% decline in the previous quarter, it fell short of the expected 0.7% rise.

Capital Expenditure Categories

Building Capital Expenditure grew by 0.2%, a decline from the 0.9% increase in the last quarter. Plant and Machinery Capital Expenditure rose by 0.3%, recovering from a 1.3% drop in the previous quarter. Estimate 3 for 2025-26 anticipates capital expenditure of $174.8 billion, marking a 12.0% increase from Estimate 2 for the same timeframe. The weak overall capital expenditure figure is disappointing and suggests that business investment is currently low. This situation might put pressure on the Australian dollar, particularly as it indicates a weaker contribution to Q2 GDP. The shortfall compared to the anticipated +0.7% increase might overshadow other positive details initially. This report adds complexity for the RBA, which has kept the cash rate at 4.35% to tackle inflation, which remains above its target. The current weak spending suggests that more rate hikes may not be needed, leading traders to anticipate a longer pause. As a result, we might see a slight increase in short-term bond futures, as the market delays any potential tightening.

Positive Future Outlook

Despite the mixed data, the significant 12.0% increase in planned spending for the next financial year is a strong positive indicator. It reflects business confidence in future demand, likely fueled by steady iron ore prices above $110 per tonne and ongoing energy transition projects. This optimism should help prevent major declines in the ASX 200, especially in the resources and industrial sectors. This mixed information creates a challenging environment, suggesting that the AUD/USD pair may trade within a range in the upcoming weeks. Traders might want to try strategies that benefit from this uncertainty, such as selling options to collect premiums, assuming the currency remains caught between a weak present and a strong future outlook. This scenario resembles the trend we saw in late 2024, where weak data was consistently balanced by strong commodity exports, leading to a choppy yet stable market. Create your live VT Markets account and start trading now.

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The People’s Bank of China (PBOC) determines the daily midpoint for the yuan (renminbi) within a managed floating exchange rate system. This system allows the yuan to vary within a +/- 2% range from a central reference rate. The last closing value was 7.1500, but the new USD/CNY rate is 7.1063. This is the strongest value for the yuan since November 6 of last year.

PBOC’s Market Intervention

Recently, the PBOC added 416.1 billion yuan to the market through 7-day reverse repos at an interest rate of 1.40%. With 253 billion yuan maturing today, that results in a net injection of 163.1 billion yuan. Today’s action by the central bank clearly shows their stance against any further weakness in the yuan. By setting the midpoint at 7.1063, significantly stronger than the last market close of 7.1500, they aim to push the currency higher. This is a strong signal from policymakers. For those trading derivatives, shorting the yuan is now a riskier move in the short term. The strong fixing suggests that implied volatility on USD/CNH options might increase, as the market adjusts for possible risks in both directions, rather than just a decline. It’s important to consider strategies that take advantage of a stable or slowly appreciating currency. This policy change follows reports from July 2025 of ongoing capital outflows, a trend we’ve seen throughout much of this year. By indicating a stronger yuan, authorities likely hope to boost confidence and discourage speculative moves against the currency. We’ve noticed similar strong fixings during market stress in 2023 to prevent steep depreciation.

Monetary Policy and Market Impact

The simultaneous injection of 163.1 billion yuan into the banking system shows that the overall monetary policy is not tightening. This indicates that maintaining currency stability is the main goal, rather than slowing down the domestic economy, which experienced a GDP growth decrease to 4.8% in the second quarter. They’re ensuring that local markets have enough cash while defending the exchange rate. In the upcoming weeks, we expect the PBOC to continue using the daily midpoint to limit any notable movements toward yuan weakness. Traders should closely monitor the 2% band around the fixing, as selling USD/CNY call options with strikes near the upper limit could be a good strategy. This approach bets on the central bank’s success in defending the desired currency level. Create your live VT Markets account and start trading now.

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China’s chief trade negotiator, Li Chenggang, recently came to Canada for important talks. He co-led the Joint Economic and Trade Committee meeting in Ottawa, where both sides discussed ways to boost trade relations.

Strengthening Economic Ties

The talks aimed to find practical ways to enhance the economic relationship between China and Canada. Both countries agreed to keep communication open to ensure progress. China is ready to resolve any differences with Canada through effective actions and positive discussions. This visit highlights a commitment to strengthen and grow the trade partnership. The recent meetings in Ottawa suggest that relations between China and Canada are stabilizing. This is a positive sign for key sectors, as it can reduce risks. Although there were no major breakthroughs, the focus on practical dialogue lowers the chance of new tariffs soon. This development helps ease the uncertainty that has affected some Canadian stocks throughout 2025. We believe this situation will lead to less volatility for Canadian assets with strong ties to China. Traders might explore strategies like selling puts on the S&P/TSX 60 ETF or specific commodity producers. After experiencing high volatility during trade disputes in early 2025, a return to stability seems likely.

Opportunities In Trade Relations

This is particularly important for our commodity markets, especially in agriculture and potash. Bilateral trade fell by nearly 5% year-over-year in the first half of 2025, but a recovery could lead to increased shipments to China, which has historically imported over 3 million tonnes of Canadian potash each year. We expect renewed interest in futures contracts for these products. Improved relations may also support the Canadian dollar, which has been below the 0.73 USD mark during much of the third quarter. Enhanced trade flows could help the dollar break out of this range, making call options on the CAD/USD currency pair an appealing strategy. We are keeping an eye on a shift back to levels seen in late 2024. There are also opportunities with options on Canadian companies in the transportation and natural resources sectors that depend on Chinese demand. Over the past year, these companies faced higher hedging costs due to political uncertainties. With improving relations, these costs are likely to decrease, potentially benefiting their stock prices. Create your live VT Markets account and start trading now.

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Business confidence in New Zealand rose to 49.7% in August, up from 47.8% in July. This indicates that companies are feeling more optimistic about better business conditions as inflation rates drop. However, the forecast for individual business activity has decreased. In August, only 38.7% of businesses expected growth, a decline from 40.6% in July.

Expectations for Economic Improvement

Overall, 49.7% of companies believe the economy will improve in the next year. This is an increase from the 47.8% optimism seen in July. This mixed report calls for caution in the weeks ahead. While the rise in overall business confidence is encouraging, the drop in firms’ expectations for their own activities reveals some underlying weaknesses. This situation may keep the New Zealand dollar fluctuating, as traders balance general optimism against specific challenges. The optimism seems to stem from easing inflation. The Q2 2025 Consumer Price Index showed a year-over-year increase of just 3.8%. This decrease reduces the pressure on the Reserve Bank of New Zealand to raise rates again, suggesting that the Official Cash Rate will stay steady at 5.50%. As a result, trading strategies that focus on lowering interest rate volatility may become more attractive.

Diverging Confidence Metrics

The decline in the outlook for personal business activity from 40.6% to 38.7% serves as a warning for the domestic economy. This indicator has consistently predicted GDP performance, indicating possible challenges for corporate earnings. Traders may want to hedge long equity positions by buying put options on the NZX 50 index. We observed a similar pattern of diverging confidence metrics in late 2022, when the economy faced peak inflation and aggressive rate hikes. During that time, the NZD/USD exchange rate showed substantial volatility without a clear direction. This historical context suggests that options strategies designed to benefit from a volatile or range-bound market, like selling strangles, could be useful. Create your live VT Markets account and start trading now.

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The Bank of Korea has kept its interest rate steady at 2.5%, which matches expectations after a thorough review. For South Korea’s economy, GDP growth is forecasted to rise by 0.9% in 2025 and by 1.6% in 2026. Inflation predictions have also changed, with the bank expecting it to be 2.0% in 2025, slightly up from 1.9%. By 2026, inflation is projected at 1.9%, which is just above the previous estimate of 1.8%.

Governor Rhee’s Press Conference

Governor Rhee Chang-yong will hold a press conference at 0210 GMT, or 2210 US Eastern Time. This event could provide more details about the bank’s choices and what the future holds for the economy. While the Bank of Korea’s decision to keep rates at 2.5% is not surprising, the new growth forecasts are concerning. The GDP growth prediction for 2025 has been cut to only 0.9%, indicating worries about the economy’s stability. This low growth forecast raises the chance of future rate cuts, even with inflation at the target of 2.0%. We should also expect the Korean Won to weaken against the US dollar. Since the US Federal Reserve has its rates around 3.75% as of last month, the difference makes holding dollars more appealing. If the Bank of Korea hints at easing its monetary policy, the pressure on the Won may increase. The outlook for the KOSPI index appears tough for now. The significant reduction in the growth forecast suggests lower corporate earnings, especially after a 5.2% drop in exports in July 2025. Although future rate cuts might provide some support, the immediate challenge comes from a slowing economy.

Market Volatility Expectations

The governor’s press conference today is a key event that could create market volatility. People will closely watch his tone for clues on when to expect potential easing. Options on the USD/KRW pair could be used to prepare for a big price shift, as his comments might influence the currency significantly. This situation feels like what we witnessed in late 2019, just before the pandemic, when declining global demand led the Bank of Korea to start cutting rates. Back then, early signals hinted at a change in policy months before it happened. We may be entering a similar phase where the central bank’s guidance heavily influences the market. Create your live VT Markets account and start trading now.

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