Yen Remains Under Pressure Amid Elevated Oil Prices
With oil prices holding firm around $115 a barrel and the USD/JPY exchange rate pushing past 165, we see continued pressure on the yen for the coming weeks. This weakness is directly tied to the ongoing Iran conflict, which is keeping the vital Strait of Hormuz closed and inflating Japan’s energy import bill. The situation makes it difficult to build a case for a stronger yen in the immediate term. Japan’s latest trade figures, released in May 2026, confirmed another significant deficit, reinforcing how sensitive the economy is to high energy costs. As a major net importer of oil and gas, Japan’s trade balance suffers directly when fuel prices remain elevated. This fundamental economic strain will likely continue to weigh on the yen against its major trading partners.Divergent Central Bank Responses And Trading Strategies
We see a significant divergence in how central banks are perceived to react to this inflation. While markets anticipate that high oil prices might keep the Fed and ECB hawkish, with their policy rates at 5.5% and 4.75% respectively, they expect the Bank of Japan to maintain its near-zero interest rate policy. This widening interest rate differential makes holding yen deeply unattractive and continues to fuel carry trades against it. Given this environment, we believe shorting the yen remains the prevailing strategy. Buying out-of-the-money call options on USD/JPY for July or August expiry offers a defined-risk way to position for further depreciation. We also see value in EUR/JPY call spreads to capitalize on the wide interest rate gap with the Eurozone while managing premium costs. However, we must be alert to any signals of a resolution in the Iran conflict, as this could trigger a sharp and rapid yen recovery. We saw a similar dynamic after the resolution of the South China Sea tensions in 2024, when the yen rallied 4% against the dollar in under two weeks. For this reason, layering in some longer-dated, low-cost yen call options could serve as a prudent hedge against a sudden geopolitical shift.Start trading now — click here to create your real VT Markets account.
