Insights 
VT 
USD/JPY trades around 154.05 in the early Asian session. The Japanese Yen weakens against the US Dollar as the BoJ maintained its interest rate at 0.5%. Traders anticipate the US ISM Manufacturing PMI report later.
BoJ Governor Kazuo Ueda cites the need for more information before deciding on rate hikes. He avoids providing a timeline for any rate future hikes, impacting the Yen’s performance. The Fed’s stance on maintaining rates provides some support to the US Dollar.
Interest Rate Updates
The Federal Reserve kept its benchmark rate at 3.75%-4.0%, with Chair Jerome Powell stating a further reduction is not assured. Fed funds futures traders reduced their expectation of a December rate cut to 63% from 93% in the previous week.
The ongoing US government shutdown continues into the sixth week without resolution. A protracted shutdown may raise economic concerns, potentially weakening the USD against the JPY.
The Yen’s value is influenced by the BoJ’s policies, US-Japan bond yield differentials, and market sentiment. The BoJ’s past ultra-loose policies depreciated the Yen but recent policy shifts offer some support. In turbulent times, the Yen is viewed as a safe-haven currency.
The divergence in central bank policy is becoming very clear for us. The Federal Reserve is signaling it may not cut interest rates again in December, while the Bank of Japan is holding off on further rate hikes. This fundamental difference should continue to support the US Dollar against the Japanese Yen.
Market Strategy and Risks
Looking at the data, the latest Non-Farm Payrolls report for October, which we saw just before the weekend, showed a solid gain of 195,000 jobs. This job strength reinforces the Fed’s position to wait, keeping the dollar attractive. On the other hand, Japan’s national core CPI from last week came in at 2.7%, and while it’s above the BoJ’s target, it’s not accelerating, giving Governor Ueda room to be patient.
For derivatives traders, this suggests a strategy of buying USD/JPY call options in the coming weeks. The clear policy path points towards potential further gains for the pair, possibly testing the 155-156 range. Options provide a way to capitalize on this upward momentum while defining our risk.
However, we must remain aware of the risk of intervention from Japanese authorities. We remember the Ministry of Finance’s actions back in 2024 when the pair crossed similar high levels, which could cause a sharp, sudden drop. The ongoing US government shutdown also poses a risk, as a prolonged stalemate could start to negatively impact US GDP forecasts and weigh on the dollar.
The interest rate differential remains the most powerful factor at play. The yield on the 10-year US Treasury is hovering around 4.1%, while the 10-year Japanese Government Bond is at 1.2%. This significant gap makes holding US dollars far more profitable, providing a strong underlying bid for the currency pair.
