USD/JPY traded lower on Monday as the US Dollar gave back earlier gains on hopes of a deal linked to the US-Iran conflict. Selling was limited because higher oil prices kept the Japanese Yen under pressure, leaving the pair within a one-month range.
USD/JPY was near 158.75, down from an intraday high of 159.20. The US Dollar Index was around 98.00 after a gap higher at the open and a peak of 98.49.
Iran again closed the Strait of Hormuz, citing ceasefire violations tied to a US naval blockade. The US Navy intercepted and boarded an Iranian cargo vessel in the Gulf of Oman, and Iran threatened retaliation while saying it would not attend more talks unless the blockade is lifted.
WTI crude was about $87.35, up over 4% on the day after falling sharply last week. Japan is a net energy importer, so higher oil prices can raise domestic costs.
A second round of peace talks, reportedly led by Pakistan, is expected on Tuesday before the two-week truce expires on Wednesday. US President Donald Trump said it is “highly unlikely” he will extend the ceasefire and said the strait will not reopen until a deal is signed.
Higher oil prices add to inflation concerns and can weigh on growth, shaping expectations for the Federal Reserve and the Bank of Japan. Reuters reported the BoJ may delay any rate rise at its next meeting.
This week’s data includes US Retail Sales, preliminary S&P Global PMIs, and Japan’s National CPI.
With USD/JPY stuck in a tight range around 158.75, the coming weeks are defined by the binary outcome of the US-Iran talks. The market is hesitating before the truce expires on Wednesday, creating a textbook case for using options to trade the coming volatility. We believe traders should consider strategies that profit from a large price swing, regardless of the direction.
Buying a volatility position like a straddle makes sense right now, as it will pay off if the pair breaks sharply higher or lower. This strategy involves buying both a call and a put option with the same strike price, capitalizing on the uncertainty surrounding the talks. The premium paid is the maximum risk, which is prudent given that headlines could cause a violent move at any moment.
For those who believe a peace deal will be reached, buying puts on USD/JPY is a direct way to position for a drop. A de-escalation would likely cause oil prices to fall, which we know from past energy shocks is a major positive for the yen. We remember how Japan’s trade deficit swelled in 2024 to over ¥1.7 trillion in a single month due to high energy import costs, so a reversal of that would strengthen the JPY significantly.
Conversely, if we expect the conflict to escalate, buying call options is the way to prepare for a move higher. A breakdown in talks would likely send oil prices soaring and trigger a safe-haven rush into the US dollar, pushing the pair upward. This would test the 160 level, a point where we might see intervention from the Japanese Ministry of Finance, similar to the record ¥9.8 trillion they spent defending the yen back in the spring of 2024.
This geopolitical flare-up complicates things for central banks, making it difficult to trade on interest rate expectations alone. The Fed may have to delay rate cuts if oil-driven inflation persists, a situation reminiscent of the stubborn inflation readings in 2024 that pushed back initial rate cut forecasts. Meanwhile, the Bank of Japan seems paralyzed, unable to normalize policy while facing such a large external shock.
Beyond the currency pair itself, we see opportunities in oil derivatives. Given that WTI crude is trading up at $87.35, buying call options on oil futures is a direct hedge or bet on the conflict worsening. This allows traders to express a view on the core driver of this market uncertainty, independent of the complex cross-currents hitting both the dollar and the yen.
