The Japanese yen is the weakest G10 currency both month to date and year to date. USD/JPY is trading just below 160 after briefly moving above 160 at the end of last month, amid concern about possible action from Japan’s Ministry of Finance if the pair rises further.
Upcoming policy meetings from the Bank of Japan and the US Federal Reserve are expected to shape near-term moves in USD/JPY. If the Bank of Japan does not raise rates next week, USD/JPY could move above 160, which could prompt a response from the Ministry of Finance.
If the Bank of Japan does not announce a rate rise on 28 April, attention may shift to guidance that a move in June is likely. Without either a rise or clear guidance, the chance of another test of the 160 level increases.
The outlook also depends on whether the Federal Open Market Committee still allows for another rate cut this year. Rabobank’s central forecast is USD/JPY at 158 in three months and 152.00 in six months, based on a hawkish Bank of Japan and an easing-leaning Federal Reserve.
The Yen is once again the G10’s weakest currency this year, with the dollar-yen pair holding just below the 160 level. This situation feels very familiar, creating significant fear of foreign exchange intervention by Japan’s Ministry of Finance. We saw this play out back in April and May of 2024, when authorities spent over ¥9 trillion to support the currency after it breached this exact threshold.
All eyes are now on the Bank of Japan’s policy meeting next week, scheduled for April 27th. While we do not expect a rate hike, the absence of strong guidance for a move in June could easily propel the pair above 160. Such a move would almost certainly force a reaction from financial authorities.
The Federal Reserve meeting on May 3rd will also heavily influence the pair’s direction. Recent U.S. inflation data has been stubborn, with the last core PCE reading at 2.8%, making the Fed hesitant to signal rate cuts. A hawkish tone from the FOMC will likely add to the upward pressure on the dollar against the yen.
For derivative traders, holding outright long positions in dollar-yen is extremely risky given the potential for a sudden, sharp reversal. We believe buying JPY call options, or USD/JPY put options, with a one to three-month expiry offers a more prudent approach. This strategy allows for profiting from a potential yen recovery while strictly defining the maximum possible loss.
The constant threat of intervention is keeping implied volatility elevated, with one-month volatility currently at 11.2%, up from around 8.5% earlier in the year. This environment makes option straddles or strangles interesting for those who expect a major price swing after the central bank meetings but are unsure of the direction. This allows traders to benefit from a large move, whether it is a surge past 160 or a sharp drop from intervention.
