The USD/JPY pair trades near 152.05 early in the Asian session on Monday, recovering after previous selling pressure due to US tariff threats against China. China warned of reprisals if the US imposes 100% tariffs, raising concerns over the trade war’s impact.

Trade Tensions Affecting USD JPY

Traders await China’s Trade Balance data due later on Monday. US trade tensions and government shutdown concerns could affect the US Dollar against the JPY in the short term, while the reopening of the US federal government is closely monitored.

The Bank of Japan’s (BoJ) potential lack of rate hikes may dampen the JPY. Nonetheless, verbal interventions might limit its decline, especially after Japanese Finance Minister’s warnings about FX market volatility.

The JPY’s value is influenced by Japan’s economy, BoJ policy, Japanese and US bond yield differences, and trader sentiment. The BoJ’s historical interventions aim to manage the Yen’s value, often in response to the policy differences with other central banks.

Recently, the BoJ’s move to unwind its ultra-loose policy supported the Yen. The JPY is regarded as a safe-haven asset, gaining during market stress due to perceived reliability.

With USD/JPY hovering around the 152.00 level, we see a major conflict between opposing forces creating significant uncertainty. The threat of new US tariffs on China introduces risk-off sentiment that typically strengthens the Yen, while a potentially more dovish Bank of Japan pulls the currency in the opposite direction. The Cboe/CME FX Yen Volatility Index (JYVIX) has reflected this, recently jumping to 12.5%, indicating traders are pricing in larger price swings.

Strategy Against USD JPY Volatility

The risk of direct intervention from Japanese authorities to strengthen the Yen seems very high at these levels, which should cap the upside for now. We remember the Ministry of Finance stepping in with massive yen-buying operations back in late 2022 when the pair last crossed the 150-152 threshold. Therefore, selling out-of-the-money call options or implementing bear call spreads above 153.50 could be a viable strategy to collect premium while betting that this ceiling will hold.

On the other hand, the escalating trade rhetoric from the US creates a serious downside risk for the dollar. Looking back at the 2018-2019 trade disputes, the Yen often found strength during periods of peak tension as investors sought it out as a safe haven. With the VIX closing last week above 19 for the first time in months, buying put options on USD/JPY offers a clear way to hedge against, or profit from, a sharp drop if the trade war fears intensify.

Given that the pair could break out strongly in either direction, the elevated volatility suggests that options strategies designed to profit from a large move are appropriate. This environment makes buying both call and put options, known as a long straddle, an attractive strategy for the coming weeks. While the rising currency volatility makes these options more expensive, it also signals the market is bracing for a significant move that could make such a position profitable.

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