Insights 
VT 
Federal Reserve’s Decision-Making Challenge
The USD/JPY pair sees slight losses, trading near 151.90 during Thursday’s early Asian session. Concerns about the US-China trade situation and the ongoing US government shutdown are affecting the US Dollar against the Japanese Yen.
The US government shutdown has reached its fourth week, with no resolution yet. The Senate plans another vote on a funding bill, but it is likely to fail. This shutdown is the second longest in US history.
Key US economic data release is suspended, complicating the Federal Reserve’s decision-making. The Federal Reserve is expected to decrease its key interest rate by 25 basis points on October 29 and again in December, impacting the Greenback against the JPY.
Japan’s new Prime Minister, Sanae Takaichi, is preparing a new economic stimulus package expected to exceed last year’s $92 billion. Traders foresee expansionary fiscal policy affecting the currency.
The Japanese Yen is influenced by various factors, including the Bank of Japan’s policies, Japanese and US bond yield differentials, and broader market risk sentiment. Currency control is a mandate of the Bank of Japan, with past interventions often lowering the Yen’s value. Over the last decade, Japan’s ultra-loose monetary stance has supported the USD over the JPY.
Volatility in USD/JPY Options
The ongoing US government shutdown, now entering its fourth week, is the dominant factor creating uncertainty and weighing on the US dollar. We see this paralysis shaving an estimated 0.2% off fourth-quarter GDP for each week it continues, based on recent analyst consensus. This political deadlock and its economic fallout are directly pressuring the USD/JPY pair.
The Federal Reserve is essentially flying blind without key economic data from the Bureau of Labor Statistics and the Census Bureau. Markets are now pricing in a 92% probability of a 25 basis point rate cut on October 29, according to the CME FedWatch Tool. This strong expectation for easier monetary policy will likely keep a ceiling on any significant dollar rally in the coming weeks.
On the other side of the trade, we are watching Japan’s new Prime Minister, who is preparing a large fiscal stimulus package rumored to be near ¥15 trillion. This kind of expansionary spending, similar to packages seen in the early 2020s, tends to weigh on the Japanese Yen over the medium term. This will likely prevent a dramatic strengthening of the Yen and put a floor under the USD/JPY pair.
Given the political uncertainty and lack of US data, implied volatility in USD/JPY options has ticked higher. We’ve seen the 1-month volatility index for the pair rise from 8.5% to 10.2% over the past two weeks, reflecting trader anxiety. This environment makes strategies that profit from price swings, such as buying straddles or strangles ahead of the October 29 Fed decision, worth considering.
For traders with a directional bias, the combination of a dovish Fed and shutdown concerns suggests a bearish outlook for the dollar. Buying USD/JPY put options with expirations in late November offers a defined-risk way to position for a potential slide below the 151.00 support level. Looking back at the extended government shutdown of 2018-2019, we saw a similar pattern of dollar weakness that ultimately favored the yen.
