The US dollar retains support from robust domestic growth, the appeal of US assets and expectations that the Federal Reserve will keep tightening. Minutes from the September FOMC meeting said an increase in the federal funds rate would be appropriate towards year-end, while futures imply a 19% chance of an October move and an 86% probability in December. By contrast, markets price much lower odds for the Bank of Japan, at 5% and 70% for those months respectively, a mix that keeps the bond yield spread wide and underpins USDJPY. US involvement in yen-buying has been described as limited, with the Fed saying it did not deploy its own funds and acted only as an agent for the Treasury.
Japan has nonetheless shouldered the heavy lifting, with around $97.5 billion spent on USDJPY sales in the month to 26 August, as hedge funds moved back to net short yen positions after a two-week pause. Oil is another headwind, with Brent holding above $100 per barrel; in a Reuters survey, 37% of experts cited oil-market volatility as the main threat to Japanese companies, versus 21% pointing to currency swings and 19% to higher BoJ rates. Against the euro, the yen has firmed as the single currency is increasingly used as a carry-trade funding currency, pressured by France’s fiscal strains, capital outflows and EURJPY sliding to its lowest since November.
Derivative Trading Opportunities Amid Euro and Yen Weakness
We see a compelling opportunity for derivative traders to short EUR/JPY in the coming weeks. The French fiscal deficit, which has hovered near 6% of GDP, continues to drive capital out of the eurozone and push the euro down. This political and economic instability has pushed the EUR/JPY pair to its lowest levels in nearly a year, making the euro a preferred funding currency for carry trades.
At the same time, we recommend focusing on buying USD/JPY call options to capitalize on the widening interest rate gap. With US Treasury yields climbing and the 10-year yield hovering around 4.3%, the US dollar remains highly attractive compared to the low-yielding yen. Futures markets indicate an 86% probability of another Federal Reserve rate hike by December, while the Bank of Japan has only a 70% chance of acting in the same timeframe.
Intervention Trends and Hedging Strategies
Traders should not be deterred by fears of joint currency intervention, as recent actions show Washington’s participation is mostly nominal. Data shows Japan shouldered the heavy lifting alone, spending roughly $97.5 billion on yen-buying interventions during its peak campaign earlier this year. Consequently, we expect hedge funds to continue rebuilding their net short positions on the yen, further fueling USD/JPY strength.
Additionally, derivative traders should hedge against further yen weakness by utilizing Brent crude oil futures. Brent’s persistence near the $100 per barrel mark places immense pressure on Japan’s energy-import-dependent economy, with surveys showing 37% of Japanese firms view oil volatility as their primary threat. Historically, sustained oil prices above this threshold have correlated with a steady depreciation of the yen as Japan’s trade balance worsens.
