Insights 
VT 
The USD/JPY rate increased to around 153.15 during early Asian trading on Monday. This rise is attributed to the Japanese Yen weakening against the US Dollar, amid optimism surrounding a potential trade deal between the US and China.
US and Chinese economic officials agreed on a trade deal framework prior to Presidents Trump and Xi meeting in South Korea. This agreement has mitigated the threat of 100% US tariffs on Chinese imports, initially set for November 1.
Impact On Risk Sentiment
Positive developments in the US-China trade talks improved risk sentiment, adversely affecting the Yen’s position as a safe-haven currency and lending stability to the USD/JPY pair. Additionally, US CPI inflation data fell short of market expectations, increasing the likelihood of a Federal Reserve interest rate cut.
In September, US CPI inflation rose by 3.0% year-on-year, slightly below the forecast of 3.1%. Monthly, CPI grew by 0.3%, following a 0.4% increase in August, while core CPI rose by 0.2%.
The Yen’s depreciation comes despite a rise in Japanese core inflation, ahead of an anticipated unchanged rate policy meeting by the Bank of Japan. The BoJ’s 2013-2024 ultra-loose monetary policy has influenced the Yen’s value against other currencies.
The move in USD/JPY above 153.00 is being driven by optimism over a US-China trade framework, creating a risk-on environment that weakens the safe-haven yen. This momentum is strong, but it relies heavily on the political outcome of the upcoming Trump-Xi meeting. We should remain cautious, as we saw similar spikes prove temporary during the intense market volatility of 2023 and 2024.
Federal Reserve’s Influence
Softer US inflation data, with the Consumer Price Index at 3.0%, complicates a purely bullish dollar view and brings potential Federal Reserve rate cuts into focus. The CME FedWatch Tool is already showing an increased probability of a rate cut in the first quarter of 2026, a shift from just a month ago. This makes selling out-of-the-money call options on USD/JPY an attractive strategy to collect premium, betting that the Fed’s stance will cap the rally.
We must also consider the Bank of Japan, which is set to meet this week. Even after the historic end to negative interest rates back in early 2024, the policy divergence between the US and Japan remains immense, keeping pressure on the yen. Any sign of further policy normalization from the BoJ could cause a sharp reversal, making it prudent to hedge long dollar positions with put options.
Given the lower market volatility, traders who believe the trade deal will proceed should consider buying call options with a strike price around 155.00. Implied volatility has likely decreased on this positive news, making options cheaper and offering a cost-effective way to capture further upside. This strategy offers defined risk if the political situation suddenly deteriorates.
For those less certain, a neutral strategy like an iron condor could be appropriate, designed to profit if the pair remains in a range between 151.00 and 155.00. This approach benefits from time decay and the possibility that neither the trade optimism nor the weak inflation data will create a decisive breakout in the immediate future. This allows us to collect premium while waiting for a clearer trend to emerge from central bank meetings.
