Insights 
VT 
The USD/JPY has been declining as the US Dollar weakens due to intensifying US-China trade tensions. President Trump’s announcement of 100% tariffs on Chinese imports and Beijing’s counteraction on rare-earth exports have impacted market sentiment.
The prolonged US government shutdown is affecting confidence. The Senate is set to vote on a spending bill to reopen federal agencies. Meanwhile, expectations of Fed rate cuts persist, with traders forecasting a 97% probability of a rate cut at the October meeting and 95% in December.
Japan’s Political Landscape
Japan’s political situation remains uncertain as the Liberal Democratic Party’s Takaichi awaits parliamentary approval to become Prime Minister. The proposed parliamentary vote on a new Prime Minister adds to the uncertainty, with no consensus reached on the date.
In currency movements, the Japanese Yen led gains against the US Dollar, showing a trade at JPY/USD. It was also recorded at -0.24% against the Euro, -0.56% against the Pound, and at various levels against other currencies. The currency heat map outlines the percentage changes among major currencies with the Japanese Yen notably stronger against the US Dollar today.
Given the pressure on the US Dollar, we should anticipate further declines in the USD/JPY pair. The combination of trade escalations, a potential government shutdown, and near-certain Fed rate cuts creates a powerful bearish case for the dollar. This outlook suggests the recent drop from 153.27 is likely to continue in the weeks ahead.
Market Strategies for Traders
For traders, this environment favors strategies that profit from a falling USD/JPY. Buying put options is a straightforward approach, allowing us to capitalize on downside movement while capping our maximum loss at the premium paid. This is particularly prudent given that implied volatility is likely to rise ahead of the multiple risk events scheduled for late October and early November.
We have seen this pattern before, particularly during the US-China trade war escalations of 2019. In August of that year, similar tariff threats from the Trump administration caused USD/JPY to fall by over 3% in just a few weeks as investors fled to the safety of the yen. The current setup, with 100% tariffs on the table, points to a potentially sharper reaction this time around.
The near 100% probability of Fed rate cuts in both October and December adds significant weight to the dollar’s weakness. The US government shutdown is also a real economic drag; looking back, the Congressional Budget Office estimated the 35-day shutdown in 2018-2019 cut $11 billion from the US economy. With markets pricing in these headwinds, the path of least resistance for USD/JPY appears to be lower.
Key dates to watch are the Fed’s decision on October 30 and the tariff deadline on November 1. We should structure any derivative positions to capture the expected price swings around these events. Therefore, purchasing puts with expirations in mid-to-late November would be a logical way to position for the anticipated turmoil.
