USD/JPY climbed above 160 for the first time since 29 July after remarks from Kevin Warsh supported the dollar, pushing Treasury yields higher while equities lost momentum. In derivatives pricing, the implied chance of a Fed rate rise in September increased to 60% from 38%, while CME futures put the probability of two federal funds rate hikes in 2026 at 49%, up from 21% before the Jackson Hole speech. The move through 160 initially failed to hold, even as positioning data showed yen shorts rising for a second straight week. The pair has also retraced half of the decline that followed currency intervention totalling a record $98.7bn.
Geopolitical tension added pressure through energy markets after US strikes on Iran and retaliatory attacks on American bases in Jordan, lifting Brent back above $90 a barrel and reinforcing inflation concerns. Treasury Secretary Scott Bessent addressed Congress on Washington’s role in coordinated FX intervention, citing Japan’s status as the largest holder of Treasuries and the risk that disorderly yen moves could raise US borrowing costs. Separately, futures markets price the probability of BoJ tightening at over 80% at its September meeting.
Managing Volatility in USD/JPY and Rates
We suggest derivative traders prepare for extreme volatility in USD/JPY over the coming weeks as both the Fed and the Bank of Japan prepare for crucial September meetings. With the market pricing in an 80% chance of a BoJ hike and a 60% chance of a Fed hike, short-term option premiums are likely to rise. We recommend buying USD/JPY straddles or strangles to profit from sharp movements in either direction, rather than taking directional risks.
History shows us that Japanese currency interventions are powerful but temporary, similar to the record $98.7 billion spent recently to defend the yen. During previous major intervention episodes, USD/JPY one-month implied volatility regularly surged past 14%, creating highly profitable environments for option buyers. We believe that positioning with long volatility options now will protect portfolios against sudden, aggressive moves by the Japanese Ministry of Finance.
In the interest rate space, we should look closely at CME derivatives, which show a massive leap in rate hike expectations for 2026 to 49% from just 21%. Traders can capture this shift by shorting short-term Treasury futures or buying put options on Secured Overnight Financing Rate (SOFR) futures. This strategy will yield high returns if hawkish monetary rhetoric continues to push bond yields upward through September.
Energy Markets and Inflation Hedges
Finally, we must not ignore the energy sector, where Brent crude has surged past $90 per barrel due to escalating tensions in the Middle East. To hedge against a broader market sell-off driven by energy-led inflation, we advise buying out-of-the-money call options on Brent crude futures. Historically, geopolitical supply shocks can send oil prices up by 15% to 20% in a matter of weeks, which would severely pressure global equity indices.
