In May 2025, ANZ Job Advertisements dropped by 1.2% compared to a previous decline of 0.3%. This suggests a decrease in job opportunities across Australia during this time. The Melbourne Institute’s monthly inflation gauge showed a 0.4% decline month-on-month, marking the largest drop in 33 months. On a yearly basis, inflation fell from 3.3% in April to 2.6%.

Trimmed Mean Analysis

The trimmed mean, which offers a more stable view, decreased by 0.3% month-on-month. This is the biggest drop in three years, with a year-on-year decline from 3.3% in April to 2.8%. Clearly, there is a noticeable drop in labor demand alongside slower price growth. The consecutive monthly decline in job ads indicates that businesses are becoming cautious. As hiring slows, it appears that employers are hesitant to bring on new staff due to weaker demand and ongoing cost concerns. When companies reduce recruitment, this often signals a future slowdown in overall economic activity. Inflation dynamics are shifting more rapidly than many anticipated. The 0.4% month-on-month decline in the headline figure is significant—it represents the steepest drop in nearly three years. Comparatively, inflation decreased from 3.3% to 2.6% year-on-year, comfortably within the RBA’s target range. The trimmed mean, which eliminates unpredictable items, has also seen a notable decline, easing to 2.8% from 3.3%, marking its lowest level since mid-2021.

Market Implications

Together, both labor demand and consumer prices are trending downwards. This suggests that underlying momentum is weakening, reducing the likelihood of tightening measures. These trends are not isolated; they point to a cooling economy. From a strategic outlook, investors may want to adjust their positions in rate products. With inflation decreasing and job growth slowing, chances for further rate hikes are lessening. Similar situations in the past, where we observed softening price pressures alongside reduced employment activity, have led to quick adjustments in monetary policy expectations. Currie’s team had earlier noted that inflation trends could change rapidly, supporting recent outcomes. It’s not just about peak inflation being behind us; we are now focusing on how far below that peak we may go, which has implications across the board. We are closely monitoring upcoming business confidence indicators and wage data. If wage growth stabilizes or declines, similar to headline inflation, this will further lessen the case for restrictive policies going forward. In terms of market volatility, we may see a shift toward lower dispersion. With a clear downward trend, realized volatility could decrease, despite some short-term event risks. However, as expectations adjust, previously priced-in risk premiums might start to unwind. Bond market investors may find opportunities to slightly extend duration, especially in the front and intermediate parts of the yield curve, as future expectations change. We have seen similar shifts swiftly occur when data consistently underperforms. It’s important to note that Anderson pointed out last month that services inflation remained sticky. However, if the overall data continues to decline, even that aspect may begin to change. We will closely examine subcomponents—especially housing and transport—in the next reports. Whenever there is synchronized moderation in labor demand and prices, we believe in taking action rather than waiting. Create your live VT Markets account and start trading now.

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Japan’s tariff negotiator, Akazawa, will visit the United States for four days, starting Thursday. His visit focuses on discussions about tariffs. The USD/JPY exchange rate has dropped and is now trading below 143.40, reaching new daily lows. Akazawa’s upcoming visit emphasizes the importance of tariff talks, especially regarding their impact on trade and foreign exchange sentiment. Although immediate results may not appear, the ongoing dialogue can create short-term volatility as sentiments shift. As the meeting approaches, the Japanese Yen has strengthened. Today, the USD/JPY fell below 143.40, driven by profit-taking and expectations that trade discussions may favor Japan. Meanwhile, global yields are adjusting to changing interest rate views. The decline in the exchange rate wasn’t abrupt; it was steady, indicating a gradual easing rather than panic selling. This suggests a cautious optimism for the Yen, fueled by hopes for less trade friction or a more accommodating U.S. stance towards Japan’s concerns. This price movement has also been aided by a quieter session in the U.S. market, allowing the Yen to rise relatively uninterrupted. Additionally, softer Treasury yields today make the Dollar less appealing compared to low-yielding currencies like the Yen. From our perspective, it’s wise to watch for signs of policy changes or shifts in tariff priorities that could affect future rates. With recent volatility decreasing, even a small change in trade talk or interest rate expectations could lead to significant adjustments. Traders should pay attention to implied volatility and spot support levels, which are getting closer. Recent trends show that option activities are becoming more defensive regarding the Yen, and this trend may widen if talks introduce uncertainty or delays. We will observe whether Akazawa’s meetings cause any significant changes in positioning or if they simply reinforce the current cautious sentiments reflected in prices. Recently, there has been little reason to engage in aggressive long Dollar positions. Unless U.S. economic data surprises positively or yields rise again, this trend could continue. Keep an eye on the push toward 142.90 below, and see if that level holds or breaks down with energy. The next significant liquidity rates beneath this figure could come into play before the end of the month, especially if risk appetite declines or asset flows favor more defensive positions. It’s also important to monitor funding signals across Asia overnight and whether broader trends indicate a shift away from the Dollar as we approach the next set of ministerial updates. Traders often overlook how quietly tension can build beneath stable price movements; they typically become apparent only after major meetings conclude. Pay attention to unexpected comments outside official briefings, as these hints can lead to rapid responses.

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Morgan Stanley expects the U.S. dollar to drop by about 9% by mid-2024. This forecast comes as U.S. economic growth slows and the Federal Reserve is likely to cut interest rates. The bank predicts that the euro will rise from around 1.13 to 1.25, and the British pound will increase from 1.35 to 1.45. Additionally, the Japanese yen is expected to strengthen from 143 to 130.

U.S. Ten-Year Treasury Yields

Morgan Stanley believes that 10-year U.S. Treasury yields will hit 4% by the end of 2025. After that, they expect a significant drop as the Fed may cut rates by 175 basis points next year. This outlook for the dollar aligns with predictions from other major financial institutions. Ongoing trade tensions from the Trump administration play a role in this view. Currencies like the euro, yen, and Swiss franc, seen as safe havens, are poised to benefit from a weaker dollar. Morgan Stanley’s latest insights indicate that the dollar will likely decline steadily throughout the year. This is due to a slowdown in the U.S. economy and changes in Federal Reserve policy. Signs of slowing growth may lead the Fed to implement a substantial reduction in rates. A 175 basis point cut suggests strong conviction behind these expectations. The firm’s forecasts for the euro, pound, and yen highlight how differences in interest rates could drive capital flows. By projecting the euro-dollar value to around 1.25, it suggests more investments may move from the U.S. to the eurozone. This is not due to a sudden surge in European growth but a shift in expectations around yields. The British pound is expected to follow a similar trend, aided by the Bank of England’s tighter monetary stance and some positive domestic data. The yen, often misinterpreted, stands to gain from lower yield fluctuations and the kind of risk sentiment that appears during a dollar decline.

Trade Policy and Market Perception

Yields on U.S. Treasuries are forecasted to peak near 4% on the 10-year note before dropping again. If this happens as predicted through late 2025, it will be important to reevaluate yield-curve strategies. Earlier expectations of a flattening yield curve might shift to a steeper curve as we move into the rate-cut phase. The sequence of these changes is crucial. It doesn’t just mean a drop in interest rates, but also a compression of returns on fixed-income investments and a likely reevaluation of U.S. asset premiums. Trade policies still show lingering influences from the previous administration. This situation is beyond just short-term tariffs; it reflects deeper shifts in how investors view long-term dollar-denominated assets in uncertain geopolitical climates. As a result, hedging behaviors will likely evolve gradually as more information becomes available. So, what should we keep an eye on? Cross-currency basis spreads will give us early signs of changing flow patterns. We’ve already seen slight increases in dollar funding costs relative to the euro and pound, indicating gradual adjustments in demand. Additionally, FX volatilities among G7 pairs are worth monitoring. They’re not just random fluctuations; they represent a recalibration of relative value. Currently, this isn’t about moving toward higher-beta currencies. Demand is gathering around stable options: the Swiss franc, yen, and euro. This is happening steadily, not chaotically. Bryan’s analysis of capital flows supports this idea: even small changes can have a big impact when liquidity is low. Timing is important. If you jump in too early, you might miss short-term gains, so a staggered approach could be wise. The best insights are found in implied volatility curves, where flattening patterns and relatively low skew offer chances for strategic entries. It’s not about large exposure but managing risk smartly. We’ve seen similar situations in the past. While they may not be identical, they share enough similarities to draw comparisons. The dollar’s trajectory is rarely straight, but the motivation for higher returns is clearly shifting. For now, we remain focused not just on the direction of G10 pairs, but also on the conviction behind those movements. That’s where true momentum either strengthens or weakens. Create your live VT Markets account and start trading now.

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Chinese officials have recently reacted strongly to U.S. claims about breaking trade agreements. A spokesperson from China’s Ministry of Commerce acknowledged the U.S. accusations. They stated that China has followed the Joint Statement from the China-U.S. Economic and Trade Meeting by canceling or suspending relevant tariff and non-tariff measures. The spokesperson emphasized how China has responsibly implemented the agreement and worked to uphold the results of the Geneva talks. The ministry reaffirmed China’s commitment to defending its rights while acting sincerely and with integrity. **Key Points:** – China is focused on protecting its rights and has been honest in implementing the agreement. – The U.S. has imposed “discriminatory restrictive measures” against China after the Geneva talks, which violates their agreements. – The U.S. has made “groundless accusations” claiming China has violated the consensus, which China strongly denies. – The ministry urges the U.S. to change its “wrong practices.” If the U.S. continues its unilateral actions, China will firmly protect its legitimate rights and interests. This situation reflects a complex U.S.-China trade dynamic, with both nations taking strong stances. Beijing’s message is clear: Washington’s accusations are unfounded, and any escalation will be met with decisive counteraction. We see a formal pushback, not just diplomatic talk—if Washington keeps changing the terms after negotiations, China’s responses will be policy-driven and strategically timed. After the agreements made in Geneva, Beijing believes it has done its part. They claim to have removed some tariffs and reduced administrative hurdles. In their view, they have largely fulfilled their obligations. New U.S. trade restrictions are viewed as unjustified and harmful to the common ground they expected. From a trading standpoint, this situation sets the tone. There is no desire from either side to appear weak. Tariffs and trade restrictions serve not just as economic tools but as signals of broader geopolitical intentions. This adds another layer of volatility that goes beyond the news, as reactions are linked to diplomatic statements and intentions to retaliate. Given the recent statements and firm positions, it’s wise to anticipate potential policy reactions. The risk of renewed tariffs or targeted interventions could arise quickly if retaliatory actions escalate. While we don’t expect sudden changes overnight, traders should pay close attention to timing their positions, especially around official responses or policy announcements. These are likely to be hinted at in formal statements similar to what we’ve seen recently. Non-tariff strategies could also come into play, especially in sectors like technology, energy, or agriculture. Traders should watch related commodities and sector ETFs for any changes in sentiment or volume. Issues in logistics or procurement might arise from specific headlines, which could be reactive but actionable in the short term. Additionally, watch for shifts in risk appetite driven not by domestic data but by external signals—or the lack of them. When diplomatic messages become rigid, we see a short-term limit on economic cooperation. This could influence multinational earnings prospects, currency strategies, and bond market views as capital reassesses its international exposure. Above all, avoid making assumptions about these moves. They aren’t always linear or extended. The best approach may involve staying flexible, responding to market reactions instead of assumptions, and being ready to adjust to new statements—especially those from agencies directly involved in international negotiations. We remain alert to small hints released through government updates and state media, as these often come before more formal actions. It’s important not to overreact, but it’s equally crucial not to overlook well-calibrated warnings disguised as official commentary.

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The factors that caused the inflation surge during the pandemic no longer exist. Many doubt that tariffs will lead to long-term inflation, suggesting that a 10% tariff might not raise inflation to 3%. Policy discussions should focus on the real economy when inflation is close to the target. The Federal Reserve is thought to be approaching its inflation goal.

Market Forces and Long-Term Yields

Market forces determine long-term yields, which have risen partly due to concerns over government fiscal policies. There are no major issues with the sale of government bonds. However, long-term yields have gone up because foreign buyers are feeling anxious. Federal Reserve member Chris Waller mentioned that rate cuts might happen later in 2025. The article discusses a decrease in inflationary pressures that spiked during the pandemic. It suggests that the causes of these price increases—such as supply chain disruptions and excessive government stimulus—have faded. It also downplays the inflation risk from suggested tariffs, indicating that even a broad-based 10% tariff would not significantly raise inflation above current levels. The conversation shifts to how central banks should act when inflation is near their target. In such cases, it’s better to focus on the real economy rather than just inflation numbers. If price increases stay within a preferred range, monetary policy choices—like cutting or raising interest rates—should reflect the strength of the economy instead of short-term fluctuations. Long-term yields mainly respond to investors’ views on fiscal sustainability and public debt levels. These yields have increased partly due to rising concerns about government financial management. The recent rise is not linked to issues with selling government bonds; instead, it indicates the caution of foreign investors monitoring fiscal developments carefully.

Implications for Interest Rate Strategies

Waller’s suggestion of potential rate cuts later next year gives a timeline. It shows that central bank officials may consider loosening policy if certain conditions are met. This perspective influences the rates market, adding volatility across the middle and long end of the yield curve. For those tracking derivatives—especially interest rate futures and options—this means implied volatility could remain high as opinions shift based on new data or speeches. With bonds responding to macro signals and rate paths not fixed, we need to adjust our strategies weekly. For example, yield curve trades should consider not only the expected level of rates but also how the market anticipates changes over time. This combination of slowly falling inflation, ongoing fiscal worries, and changing central bank messages creates a short-term environment where price movements may overreact to small shifts in guidance or data. It underscores the importance of liquidity in execution, especially with fewer solid expectations for rates as the year ends. More defensive strategies, tighter stops, and a reevaluation of carry trades should be part of our weekly plan. Create your live VT Markets account and start trading now.

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Japan’s Jibun Bank PMI Manufacturing for May 2025 stood at 49.4, marking the 11th consecutive month of contraction in the sector. This final reading improved from April’s 48.7 and a preliminary figure of 49.0. A survey by S&P Global indicates a shift toward stabilisation, with slower declines and increased hiring. In May, manufacturing conditions showed a slight easing in output decline, similar to April’s trends. Output and new orders continued to drop, but the pace of contraction slowed. This slowdown is linked to weak global demand, influenced by U.S. tariffs and cautious clients affecting production and orders. Manufacturers expressed growing confidence, showing optimism about future output and a quicker increase in staffing. These changes suggest that firms are preparing for a potential recovery in global demand. The data reflects a stabilising trend for Japan’s industrial sector, even amid global trade challenges. In comparison, South Korea’s May Manufacturing PMI was 47.7, Taiwan’s was 48.6, and Vietnam’s was 49.8, revealing differences in regional manufacturing performance. This summary provides insight into Japan’s manufacturing landscape in May 2025. Although the sector remains in contraction, the drop is less severe than last month. With a PMI of 49.4, below the neutral 50 mark, activity is still in negative territory. However, the improvement from previous readings of 48.7 and 49.0 suggests the downturn may be easing. The S&P Global survey indicates businesses are still cautious, but some feel the worst may be over. Rising employment aligns with this cautious optimism. The headline figure is important, but the trend across various components matters too. Output and new orders are still declining, but the pace is slowing. More firms are hiring while fewer cut back. Though this doesn’t signal recovery, it indicates that the rate of contraction is easing. Trade tensions, particularly U.S. tariffs, continue to affect output, and both domestic and international clients remain cautious, leading to stagnant new orders and contracting production. Manufacturers are planning for the medium term, showing increased optimism for future conditions. They’re boosting staffing in anticipation of a potential demand pickup later in the year, suggesting that low demand levels may not last long. This stands in contrast to regional counterparts, as South Korea, Taiwan, and Vietnam reported lower PMI readings for the same month, highlighting that Japan’s situation, while tough, may be starting to improve. For those monitoring short-term market swings tied to industrial output, especially in cyclical sectors, this slowdown in the pace of decline is significant. Even without returning to growth, the reduced negative momentum can shift pricing pressures, especially in sectors like machinery and chemicals that are linked to exports. As hiring increases and expectations for rising output grow, the implied volatility for downside hedges may begin to wane. Positions based on prolonged weakness might need tighter stops, particularly on the short side. As we approach the next data releases, it will be important to monitor indicators related to industrial input and export orders. Inventory levels and supplier delivery times could also quickly affect sentiment, especially in leveraged trades. While payroll increases and firm output plans don’t guarantee changes, they often precede a noticeable shift in purchasing activity. If overseas demand rebounds even slightly, local manufacturers will likely be prepared to respond faster than their competitors. Adjusting strategies to reflect this readiness may be beneficial. While current figures are still below growth territory, the direction of change is crucial. Contracts based on expectations of a prolonged downturn may require reassessment in light of rising business confidence and slower declines. Although timing is tight, we will remain vigilant for sustained momentum in upcoming data releases.

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Goldman Sachs expects OPEC+ to increase oil production by 410,000 barrels per day in August. After that, they foresee steady production levels starting in September. The bank is being careful with its oil price predictions due to strong supply growth outside of U.S. shale. Looking ahead, Goldman Sachs predicts Brent crude will average $60 per barrel in 2025 and $56 per barrel in 2026. West Texas Intermediate (WTI) crude is forecasted to average $56 per barrel in 2025 and $52 per barrel in 2026.

Goldman Sachs on Oil Production

Goldman Sachs is projecting a moderate increase in OPEC+ oil production in August, followed by stable supply for the rest of the year. They emphasize that there is plenty of oil available from regions outside U.S. shale, which is holding back any hopes for rising prices. Therefore, they don’t expect prices to increase significantly in the next two years. Their price forecasts support this idea. Brent crude, often considered the global standard, is expected to average $60 per barrel in 2025, which is close to current levels. This suggests Goldman Sachs doesn’t see any sharp price recoveries. In comparison, WTI, which reflects U.S. conditions, is estimated to be slightly lower at $56 for the same year. For 2026, both benchmarks see lower averages, with Brent at $56 and WTI at $52. What does this mean for market positioning? It indicates that expectations for tighter supply, which previously boosted futures contracts, are now tempered by real-world production stability. Notably, their forecast does not indicate a shortage in the market for the next two years.

Market Implications and Strategy

Current prices appear to be capped. This isn’t due to a decrease in demand, but rather because other producers outside of shale are increasing production without needing to raise prices. This keeps futures traders realistic, as there aren’t sudden shortages or barrel scrambles. With expected low volatility and steady production from major suppliers, short-term spreads might not widen significantly. Calendar spreads are likely to stay flat. For now, we wouldn’t anticipate sudden changes in the forward curve without significant disruptions. Long bets on backwardation might require patience rather than offering quick returns. The focus seems to shift towards carry performance and roll yield stability, rather than major price movements. Price drops driven by headlines are unlikely to last unless supported by major structural changes – which are not indicated in the current data. In summary, these forecasts suggest a balanced market with ample supply. Positions should reflect limited upside potential, moderate carry, and low likelihood of sudden price shocks. Create your live VT Markets account and start trading now.

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Governor Waller, in his speech about the economy, mentioned that interest rate cuts could occur later this year. This will depend on how inflation changes and whether tariffs stabilize. The strong economy up to April gives the Federal Reserve some time to evaluate trade outcomes. Tariffs might cause a temporary price increase that the Fed can overlook. However, there is still uncertainty around trade policy, which poses risks to the economy and job market. Tariffs are likely to raise inflation this year and could lead to higher unemployment, with effects lasting longer. We may see the effects of tariff-related inflation most clearly in the latter half of 2025.

Focus on Inflation Expectations

Waller highlighted his focus on market and expert opinions about inflation. He considers the long-term effects of tariffs on inflation to be moderate, viewing their price pressures as temporary. Although some surveys show that consumers expect higher inflation, Waller believes the current job market doesn’t allow workers to demand raises effectively. He remains open to rate cuts later this year, choosing to ignore any inflation pressures caused by tariffs, even if the job market stays stable. Waller’s insights clarify how the central bank is looking at price changes. Basically, he thinks the inflation caused by new tariffs may spike but is unlikely to persist. What’s more important is whether that inflation lasts, not just appears and then fades. This perspective helps policymakers be patient instead of reacting too quickly with higher interest rates. The Fed can take a step back now because recent economic data through April shows strong growth. This allows for a wait-and-see approach until there is more clarity. During such times, when market expectations are shifting and bond market signals remain stable, the focus shifts to finer details—like whether wage growth lags behind rising prices or if it starts to catch up. Waller suggests that the balance here shows inflation risks are under control, justifying a wait-and-see approach. Though some surveys indicate that households expect rising prices, other areas of the market Waller monitors show different trends. There’s a reason for this gap. Survey-based expectations often change in response to news, especially about tariffs. However, future-looking measures seen in asset prices are currently stable. This makes those measures more reliable in today’s environment.

Impact on Short-Term Rates Markets

Now, let’s consider how these factors influence short-term rates markets. Earlier this month, expectations for easing returned, but they became unpredictable due to ongoing tariff news. Understanding how the central bank is weighing these risks and selectively ignoring temporary ones helps clarify the picture. It indicates that data sensitivity will be more crucial than reacting to headlines moving forward. If tariffs start leading to widespread price increases, impacting areas like services or wages, policy officials will likely change their tone. But we haven’t reached that point yet. Current inflation readings have been cooling since March. Additionally, weaker-than-expected unit labor costs support Waller’s perspective. Going forward, we need to track how quickly inflation changes, not just the overall level. Meanwhile, employment indicators mainly reflect consumer strength rather than wage pressures. Policymakers are looking for signs that slowing job growth could reduce excess spending without harming overall consumption. In fixed income and derivatives markets, this means volatility will likely respond more to surprising increases in prices than to decreases. A gradual decline in inflation won’t prompt immediate action, as that trajectory has already been communicated. However, if inflation numbers fall sharply, it could reignite expectations for earlier rate cuts. The risk, as Waller has subtly pointed out, is overreacting to short-term changes or expecting persistent inflation where it may not exist. The upcoming period will likely favor quick reactions over firm beliefs. There’s little benefit in sticking rigidly to one view, especially if it overlooks softer data. At the same time, markets shouldn’t react too strongly to noisy inflation reports. We’ll interpret the data like policymakers do: focusing on persistence rather than drama. Create your live VT Markets account and start trading now.

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Japan’s capital spending in Q1 2025 increased by 6.4% compared to last year. This was better than the predicted growth of 3.8% and a recovery from a slight decline of 0.2% in the previous year. On a quarterly basis, capital spending also rose by 1.6%. When we exclude software, capital spending jumped 6.9% year-over-year, surpassing the expected increase of 5.3% and the previous rise of 3.1%.

Company Sales Growth and Profit Analysis

Company sales grew by 4.3% compared to a year ago. This was better than the forecast of 3.0% and an increase from the earlier 2.5%. However, profits only increased by 3.8%, falling short of the expected 6.0% and down from a prior rise of 13.5%. The USD/JPY exchange rate remained stable despite these economic changes. Overall, there’s a significant rise in corporate capital spending—much higher than what markets expected. When companies increase their investments like this, it often shows confidence in the economy and suggests that they anticipate steady or growing demand in the coming months. The fact that spending on tangible assets, such as plants and machinery, increased even more indicates that companies are focusing on long-term plans. Although the 1.6% quarterly rise may seem small, it’s more significant due to seasonal patterns and the ongoing economic uncertainty. This growth indicates that companies are no longer just holding back—they’re putting resources to work again. Sales figures show that demand is not only stable but improving. An annual gain of 4.3%, which is over a percentage point above expectations, suggests that consumers and businesses are engaging more actively. However, the slower profit growth should be noted. The 3.8% rise is considerably lower than the anticipated figure, indicating potential challenges with profit margins. Factors like rising input costs, labor expenses, or changes in product mix could be contributing to this.

Market Impact And Future Outlook

For market players, the difference between strong sales growth and weaker profits is important to watch. If companies are absorbing higher costs without increasing prices, this could limit profit growth later on. Trends like these can influence interest rate expectations as analysts question the sustainability of this business momentum. Currently, the limited movement in the currency market—where the dollar-yen exchange rate has remained steady—suggests traders are not using these numbers to change their broader economic expectations. They might believe that the pace of investment will not significantly impact the overall policy outlook. Yen volatility has been low, indicating that market participants think central bank actions and inflation expectations will remain stable, or that other events have overshadowed these data points. Looking ahead, the risks in derivatives pricing are shifting. If corporate investment continues to grow into the next quarter, it might lead to different expectations in market volatility. Market makers will consider the higher baseline of business activity, and if actual profits don’t match those expectations, it could lead to larger shifts in premium pricing around future earnings reports or central bank announcements. For now, staying close to specific calendar events and monitoring future trends remains crucial. Create your live VT Markets account and start trading now.

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The Bank of Japan is preparing for possible losses on its bond transactions by increasing its provisions. This suggests that the bank expects interest rates to rise. For fiscal 2024, the Bank has set provisions at 100% for the first time ever. This funding comes from the income generated by its bond and financial activities. Typically, the Bank targeted 50% for provisions before fiscal 2024, reaching a maximum of 95% in fiscal 2018. Recently, provisions increased by 472.7 billion yen ($3.28 billion), following a 922.7 billion yen rise in fiscal 2023. When the Bank of Japan raises rates, it affects the yen. Expectations of higher rates caused the yen to strengthen from July to September 2024, which led to changes in some yen carry trades and impacted global markets. The Bank’s full provisioning clearly shows that it believes there is a significant risk of loss in its bond holdings if interest rates keep climbing. This is a proactive financial cushion made from earlier earnings to prepare for declining bond values, which often occur when rates increase. Notably, the level of provisions has doubled in just two years. Even with elevated preparations in previous years, such as during fiscal 2018, the Bank never allocated its entire income to cover potential losses. This cautious approach suggests that the current situation is more than just routine accounting—it reflects serious expectations. By fully committing income to counteract expected declines in market values, the rise in domestic rates is seen as not just a prediction but as active preparation. These changes indicate a clear policy intent. This shift is important for those watching the derivative markets. Rising rates in Japan directly impact strategies built around stable or declining yen values. Expectations alone have already caused the yen to rise from July to September, leading to real consequences for leveraged positions tied to interest rate differences. The effect on carry trades is not just a theory; it has happened. Increased exchange rate volatility followed suit, leading to adjustments in leveraged yen positions, and raising the cost of maintaining those positions. Funding strategies that relied on low yen borrowing costs have become riskier. Even traders not directly involved with the yen have felt the effects in cross-currency spreads and volatility in Asia-Pacific options. Going forward, we should closely monitor volatility trends in the JPY market. Forward implied rates are no longer confidently predicting stable outcomes. This is influenced not only by market movements but also by hedging actions driven by rising uncertainty about interest rates. Those involved in strategies that sell volatility or have short gamma positions might need to rethink their risk levels as we approach the next rate decision. Focusing on short-term resets and broader collars can be wise. It’s better to avoid aggressive premium seeking in yen-related derivatives until we hear an official policy signal from the Bank. While the income allocation is telling, the response in swaps, credit default swaps (CDS), and Japanese Government Bond (JGB) futures will really test the market’s conviction. We should pivot from directional bets on yen appreciation to more effective hedges against rate-related shifts. Not every move needs to be extreme; timing and skew exposure will be crucial in the coming month. Careful management of hedge ratios and delta exposures in multi-currency portfolios can help maintain a balance between protection and participation. We shouldn’t try to predict the exact announcement, but we can adjust our positions to reflect the clear shift in odds already indicated by the Bank’s provisioning.

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