Yen Drivers And Oil Risk
The Yen also faced pressure as oil prices rose after US President Donald Trump increased threats against Iran. Japan is exposed to supply risks because it relies heavily on oil imports from the Middle East. Trump set a new deadline for Iran to reopen the Strait of Hormuz and increased threats against power plants and civilian infrastructure. Iranian officials said they would retaliate against US-linked infrastructure and that the strait would remain closed until war damage is compensated. Any further fall in EUR/JPY may be limited as the Euro is supported by the European Central Bank’s restrictive policy stance. ECB President Christine Lagarde and other policymakers said policy will stay restrictive until inflation returns to the 2% target. Given the conflicting pressures on the EUR/JPY, we see a recipe for significant volatility in the coming weeks. The Bank of Japan’s expected policy tightening in April suggests a stronger yen, while the escalating US-Iran conflict and subsequent oil price surge point toward yen weakness. This setup makes simple directional bets risky and favors strategies that profit from large price swings.Strategies For Higher Volatility
For those anticipating a major move, option structures like straddles or strangles could be effective, allowing a trader to profit whether the pair breaks sharply higher or lower. We’ve seen implied volatility on major yen pairs jump from an average of 8% to over 15% during past geopolitical oil shocks, so the cost of these options is a critical factor. The key will be whether the actual price move outpaces the already elevated volatility premium. If we believe the Bank of Japan’s actions will be the dominant driver, a cautious short position on EUR/JPY makes sense. Overnight Index Swaps now suggest a greater than 75% probability of a 15-basis-point hike from the Bank of Japan, a sharp increase in expectations. To manage the geopolitical risk, this short position could be hedged by purchasing out-of-the-money call options to protect against a sudden spike if the Hormuz situation deteriorates further. Conversely, a trader betting that geopolitics will overwhelm central bank policy could take a long position. With WTI crude pushing past $115 a barrel, a level not sustained since the supply scare we saw in mid-2025, the risk of a sharp JPY depreciation is significant given Japan’s import dependency. A protective stop-loss or buying put options would be essential to guard against a sudden de-escalation of tensions or a surprisingly hawkish move by the BoJ. The hawkish European Central Bank provides a solid floor for the euro, likely limiting the downside for the EUR/JPY cross. This suggests that even if the yen strengthens, the decline may be cushioned compared to other yen pairs like USD/JPY. This makes buying the pair on significant dips an interesting strategy for those who believe the oil price shock will ultimately be the more powerful force. Create your live VT Markets account and start trading now.
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