Insights 
VT 
The US Dollar remains near 153.00 against the Japanese Yen, which is under pressure due to concerns over Japan’s fiscal policies. Upcoming US economic data, including September’s Consumer Price Index (CPI) and October’s Purchasing Managers Indexes (PMIs), are being watched closely.
US Inflation Concerns
US inflation is projected to rise in September, with a yearly CPI rate of 3.1%, up from 2.9% in August. Services activity might slightly decline to 53.5, while manufacturing is expected to remain steady at 51.2.
A 25-basis-point Federal Reserve rate cut is anticipated next week, with the possibility of another cut in December. Meanwhile, Japan is considering a $90 billion stimulus plan to support households, adding further strain to the Yen.
The appointment of Sanae Takaichi as Japan’s Prime Minister adds pressure on the Yen, with expectations of continued high government spending. The US Federal Reserve aims for 2% YoY inflation, but current figures are higher, influenced by supply-chain issues and persistent price pressures.
The USD/JPY is holding firm near 153.00, and our focus is on today’s US inflation data. The September CPI report just came in at 3.2%, slightly above the 3.1% we were expecting. This sticky inflation challenges the idea that the Federal Reserve will cut rates aggressively after next week’s confirmed move.
Given this outlook, we are looking at buying call options on USD/JPY. This strategy provides upside exposure if the dollar continues to strengthen against the yen. We see options with strike prices around 154.00 and 155.00 for the coming weeks as particularly interesting.
Market Reactions and Strategies
The market is already reacting to the inflation news. The probability of a second Fed rate cut in December, which was at 90% just yesterday, has now dropped to around 75% according to Fed funds futures. This shift in expectations is the primary driver supporting the dollar right now.
On the other side of the trade, the Yen remains weak due to talk of a new $90 billion government stimulus package. This fiscal spending is putting upward pressure on Japanese government bond yields, with the 10-year yield now testing 1.15%. This pressure complicates any plans for the Bank of Japan to tighten its own monetary policy.
We must remain cautious of potential intervention from Japanese authorities to strengthen the yen. We all remember the significant interventions back in late 2022 when the pair crossed the 150.00-152.00 levels. Using options with defined risk is a smart way to protect against a sudden, sharp reversal caused by the Bank of Japan stepping in.
