Insights 
VT 
The Yen’s strength against the US Dollar is driven by safe-haven demand and potential interventions from Japanese authorities. Speculation about a rate hike by the Bank of Japan, along with a hawkish Federal Reserve outlook, influences market fluctuations. The USD/JPY declines to around 153.50, dropping 0.40% as renewed global risk aversion boosts the Japanese Yen. The Bank of Japan’s hawkish stance, expressed by Governor Kazuo Ueda, signals a possible rate hike, encouraging expectations of a policy shift.
The Japanese Yen’s growth faces limitations due to uncertainty about the Bank of Japan’s next rate change. The potential for expansionary fiscal policies by Japan’s new Prime Minister, Sanae Takaichi, could lead to cautious central bank actions. In the US, focus remains on the Federal Reserve perspective. Federal Reserve Chair Jerome Powell’s comments emphasising the need for a restrictive stance support the US Dollar Index at around 100.00.
Monetary Policy Odds
There is approximately a 70% chance of a 25-basis-point rate cut in December, down from over 90% a week ago. The forthcoming ADP Employment Report will offer insights into private-sector hiring in the US, which is critical given the ongoing government shutdown’s impact on labor data. Markets will assess private payroll information to adjust monetary policy expectations and USD/JPY direction.
The market is caught between a hawkish Bank of Japan and a Federal Reserve that is reluctant to ease policy. This tug-of-war is keeping USD/JPY volatile around the 153.50 level. We must now navigate the uncertainty of when, not if, the BoJ will raise interest rates.
The likelihood of a BoJ rate hike is growing, especially after Japan’s national core inflation for October, released last week, came in at 2.9%, slightly above the 2.8% forecast. This persistent inflation reinforces the warnings from Governor Ueda and increases the chance of currency intervention to support the yen if it weakens again. For us, this means the risk of a sudden, sharp JPY rally is very real.
In the US, the picture is becoming less clear for the dollar, especially with the prolonged government shutdown delaying key data. The recent ADP Employment report for October showed private payrolls grew by only 110,000, missing expectations and signaling a cooling labor market. This has slightly increased the odds of a Fed rate cut in the first quarter of 2026, putting a cap on the dollar’s strength.
Volatility Strategies
With global risk aversion confirmed by the VIX index holding above 20, we are seeing a significant impact on options pricing. One-month implied volatility for USD/JPY has risen to 11.5%, making long options positions more expensive. This suggests strategies that benefit from this high volatility, such as strangles, might be more appropriate than simple directional bets.
We should remember the extreme moves we witnessed back in 2022 and 2023 when central bank policies diverged so sharply. Given the current uncertainty, buying yen call options or US dollar put options offers a defined-risk way to position for a JPY strengthening. These positions can protect against a sudden drop in USD/JPY while limiting potential losses if the pair continues to drift sideways.
