USD/JPY edged lower on Friday as markets weighed the risk of Japanese government intervention to support the yen, even as the pair stayed close to Thursday’s four-decade high and the 164.00 level. The policy gap between Japan and other major economies continued to underpin the carry trade: although the Bank of Japan lifted rates to 1%, the highest since 1995, funding costs remain low versus the US. Geopolitical disruption also pressured the yen, with energy supply risks from the Middle East conflict feeding into weaker relative performance.
The US military said it completed another round of strikes against Iran on Thursday, extending operations to a 13th straight night, while Iran and allies targeted US-linked assets in Kuwait, Bahrain and Jordan. Iran-aligned Houthis also struck two Saudi oil tankers in the Red Sea, alongside the closure of the Strait of Hormuz, pushing crude to its highest level since 11 June. In the US, Jobless Claims fell to their lowest level since September 1969, reinforcing expectations of higher borrowing costs by year-end, though trading activity thinned ahead of next week’s FOMC meeting and the pair remained set for a third consecutive week of gains.
Trading USD/JPY: Intervention Risks and Carry Trade Dynamics
We recommend that derivative traders position themselves for heightened volatility in the USD/JPY pair as it hovers near the critical 164.00 level. Given the looming threat of Japanese government intervention, buying short-dated out-of-the-money put options on USD/JPY can hedge against a sudden, sharp drop. Historically, Japan’s Ministry of Finance spent a record 9.8 trillion yen ($62 billion) in spring 2024 to defend the currency, proving that intervention risks are highly potent.
We advise maintaining a cautious long bias on USD/JPY futures but utilizing tight stop-loss orders to protect against sudden policy shifts. Despite the Bank of Japan raising its benchmark rate to 1%, the massive yield spread relative to the US Federal Funds rate continues to favor the carry trade. This persistent interest rate differential means we should expect continued upward pressure on the pair once the immediate threat of intervention or next week’s FOMC meeting passes.
Geopolitical Energy Risks and US Economic Strength: Opportunities in Oil and Treasuries
To capitalize on rising geopolitical tensions in the Middle East and the closure of the Strait of Hormuz, we suggest derivative traders look into call options on Brent crude oil. Crude prices have surged past recent resistance levels, and historical precedents show that energy shocks quickly feed into global inflation expectations. We believe trading oil-linked derivatives offers a strong proxy trade, as higher energy costs will inevitably force the Federal Reserve to maintain its hawkish stance and support the US dollar.
The dramatic drop in US jobless claims to historic lows suggests the American labor market remains remarkably resilient. We recommend trading short-term Treasury futures to position for higher-for-longer US interest rates ahead of next week’s FOMC meeting. This robust economic backdrop makes any dips in the USD/JPY pair an attractive buying opportunity for medium-term options traders.
