Currency Movements and Trade Discussions
The yen experienced a drop in the early hours on Monday in Asia. This followed the resignation of Japanese Prime Minister Ishiba, causing the USD/JPY rate to land around 148.10.
Additionally, as noted, the move lower in JPY occurred around 7:35 am in Sydney, 6:35 am in Tokyo, and 5:35 am in Hong Kong and Singapore. The shift highlights developments following the resignation of Japan’s Prime Minister.
Currency and trade discussions have included topics such as Trump’s proposal for a 15-20% tariff on all EU goods, affecting EURUSD. Meanwhile, China has plans to reopen its bond market to Russian energy firms and aims to increase the yuan’s international presence through a potential offshore RMB stablecoin.
OPEC+ has announced plans to raise oil output in October, driven by Saudi’s strategy for market share. Furthermore, China has been buying gold for ten consecutive months, with bullion prices hitting over $3,500 an ounce.
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Volatility and Trade Opportunities
The sudden resignation of Prime Minister Ishiba has created a significant gap up in USD/JPY to the 148 level, presenting an immediate volatility spike. We are looking at this gap as a potential short-term opportunity to fill, which would mean a move back down towards the pre-announcement levels. Traders should consider buying near-term USD/JPY put options or selling call spreads to position for this reversion, but be mindful that implied volatility is now expensive.
This political instability in Japan suggests the yen could remain weak in the medium term, even if the initial gap closes. We remember the market turmoil following Prime Minister Abe’s resignation back in 2020, which created lasting uncertainty. A strategy for the coming weeks could involve buying longer-dated call options on USD/JPY to bet on further weakness once the current volatility subsides.
On the other side of the pair, the dollar is being supported by renewed talk of protectionist trade policies. Reports of potential 15-20% tariffs against the EU are creating a flight-to-safety bid for the dollar, which could prevent the USD/JPY from falling too far. We saw the Dollar Index (DXY) rally over 10% during the 2018-2019 trade disputes, a historical precedent that supports holding a core long-dollar view.
The broader geopolitical picture shows a continued trend away from the dollar, with China buying gold for the tenth straight month. Central bank gold purchases have been accelerating for years; global reserves increased by over 1,000 tonnes in 2022 alone. This long-term de-dollarization theme, combined with gold pushing past $3,500 an ounce, suggests that any extreme dollar strength might be capped over the long run.
Finally, the decision by OPEC+ to increase oil output is a positive development for the yen, which is often weakened by high energy prices. As a nation that imports over 90% of its energy, lower crude costs ease pressure on Japan’s trade balance. This could provide a fundamental floor for the yen and temper moves above the 150 level, a zone where we saw the Bank of Japan intervene with over $60 billion back in late 2022.
