Yen as a Funding Currency and USD/JPY Outlook
We see the Bank of Japan’s recent rate hike to 1.0% as a dovish tightening that doesn’t alter our outlook. With Japan’s latest core inflation figure at 2.8%, the real interest rate is a deeply negative -1.8%. This maintains the yen’s status as the prime funding currency for carry trades. Our focus remains on being long USD/JPY, especially as the pair trades around 160.85 this morning. The wide interest rate differential, with the US Fed Funds rate holding at 4.0%, provides a strong tailwind for the pair to test higher levels. We believe the path of least resistance is still upwards without a more aggressive BoJ stance.Derivatives Strategy and Managing Intervention Risk
For our derivatives strategy, we are favoring buying USD/JPY call options with strikes around 162 and 163 to capture further upside. The risk of intervention from the Ministry of Finance is significant, similar to the sharp but temporary reversals we saw in late 2022. This keeps implied volatility elevated, with the Cboe/JPX JPY Volatility Index ticking up to 11.5 this week. To manage the downside risk from intervention, we are layering in some cheap, out-of-the-money put options. This provides a cushion against a sudden, sharp drop below the 158 level. This approach allows us to stay in the primary carry trade while defining our risk if officials decide to act.Start trading now — click here to create your real VT Markets account.
