Insights 
VT 
The USD/JPY has softened to around 150.30 in the early Asian session on Friday. This decline follows a dovish signal from Fed Chairman Jerome Powell, as well as ongoing US political uncertainties impacting both Fed rate cut expectations and potentially delaying BoJ rate hikes.
Fed officials, including Christopher Waller, have expressed support for further interest rate reductions due to mixed job market data, weakening the USD against the JPY. The extended US government shutdown, lasting 16 days, is causing economic losses of approximately $15 billion weekly, contributing to the USD’s decline.
Political Speculations and Impact on BoJ
Political speculations suggest the BoJ might delay rate hikes due to domestic uncertainties, possibly weakening the JPY and impacting the currency pair. The BoJ’s previous ultra-loose monetary policy led to a depreciation of the JPY, but the recent policy shifts could offer some support to the currency as global interest rates adjust.
The Japanese Yen is influenced by factors such as BoJ policy, bond yield differentials, and broader risk sentiment, often seen as a safe-haven investment. Turbulence in markets typically strengthens the Yen as traders seek stable investments in more uncertain periods.
We are watching the USD/JPY pair soften below 150.50, driven by bets on a Federal Reserve rate cut and the ongoing US government shutdown. This downturn is supported by recent data showing initial jobless claims ticked up to 245,000 this past week, reinforcing the view of a sluggish US labor market. Traders should anticipate further dollar weakness as these factors weigh on the economy.
The unified dovish stance from Fed officials suggests that positioning for a weaker dollar is the primary strategy in the coming weeks. This makes buying USD/JPY put options with strike prices around 149.50 and 149.00 an increasingly considered play. These derivatives would profit if the dollar continues to fall against the yen.
US Government Shutdown and Economic Impacts
The US government shutdown, now in its third week, is creating a significant drag on economic output. This situation is reminiscent of the 2018-2019 shutdown, which we saw trim GDP growth and fuel a flight to safe-haven assets like the yen. A prolonged closure could accelerate the pair’s move towards the critical 150.00 support level.
However, the main risk to this bearish view comes from potential hesitation at the Bank of Japan. The narrowing of the US-Japan 10-year bond yield spread, which fell below 3.5% for the first time since early 2024, could reverse if the BoJ delays its own rate hikes. This uncertainty makes buying cheap, out-of-the-money call options a viable hedge against a sudden rebound in the pair.
Given these opposing forces from the US and Japan, implied volatility for USD/JPY options has been climbing. We’ve seen the Cboe/CME FX Yen Volatility Index push levels not seen since the last major BoJ policy shift back in 2024. This environment allows traders to use strategies like straddles to position for a significant price swing, regardless of which direction it ultimately takes.
