To The Moon

The market’s greatest challenge this week is that several seemingly independent trading themes are beginning to interact with one another: the yen has reached a six-month high; expectations of a Bank of Japan rate hike are building; global bond yields are broadly rising; signs are emerging of a rebound in China’s crude-oil demand; and expectations for Federal Reserve policy have once again been unsettled by comments from Donald Trump.

When these variables move simultaneously, markets rarely deliver a clean, smooth one-way trend. Instead, they are more likely to enter a high-volatility, range-bound phase marked by repeated swings in both directions. The key variable to watch now is whether the yen can make a further near-term directional break. This matters not only for the U.S. dollar index, but also because its effects may transmit through interest rates, liquidity, and risk appetite into U.S. Treasuries, U.S. equities, gold, and commodities.

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A Game That Starts With the Yen

Last week, the yen broke through the key 155 level. This should be understood in terms of the exchange-rate quotation: a move in USD/JPY below 155 means that the yen is appreciating against the U.S. dollar. Buying interest in the yen became more concentrated around that level, short-term bullish sentiment strengthened noticeably, and the technical setup began to tilt more favorably toward the yen.

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If the current market is viewed as a chessboard, then 155 was more like the yen’s first move, while the area around 151 represents the next and more important threshold. The 151 level corresponds to a previous high and will be crucial in determining whether the yen’s appreciation trend can continue. If USD/JPY declines further and establishes itself around 151, the yen may have room to appreciate further.

This would place direct pressure on the U.S. dollar index. The dollar index is not determined solely by the U.S. economy or the Federal Reserve; at its core, it reflects the dollar’s relative value against a basket of currencies. As one of the dollar’s key counterpart currencies, a sustained appreciation in the yen would exert meaningful downward pressure on the dollar. In other words, even if no new negative catalyst emerges specifically for the dollar, continued yen strength alone could leave the dollar index under passive pressure.

What the Market Is Pricing In

Behind the yen’s rise, the market is pricing in two factors.

First, the Bank of Japan is approaching its next policy meeting. Expectations for a BOJ rate hike are already well reflected in derivatives markets. The consensus view is that the probability of a Japanese rate hike is relatively high, and that such a move may not be an isolated event. It could instead be regarded as the beginning of a broader normalization of monetary policy.

Second, Japan may be supporting the yen by reducing part of its overseas securities holdings, particularly shorter-dated U.S. Treasuries. Data released by Japan’s Ministry of Finance show that, as of the end of August, Japan’s holdings of foreign securities had declined by US$87.8 billion month on month. The scale of that decline broadly aligns with the size of yen-support operations previously inferred by the market. Bloomberg analysis suggests that Japan may have sold more liquid short-dated Treasuries in order to support the yen.

Japan is a major foreign holder of U.S. Treasuries. According to Japan’s Ministry of Finance, its Treasury holdings stood at approximately US$1.1167 trillion as of June this year, the largest among foreign holders. If Japan reduces its holdings of short-dated Treasuries to support its currency, the implications go beyond yen appreciation itself. Through Treasury supply-demand dynamics and bond yields, it could place additional pressure on U.S. dollar assets.

A Warning From Rising Global Yields

The yen’s strength is not occurring in isolation. It is part of a broader rise in global bond yields.

The U.S. 10-year Treasury yield climbed to 4.81%, approaching levels seen during the 2008 global financial crisis. The 30-year Treasury yield rose to 5.31%, its highest level since 2007. Japan’s 10-year government bond yield moved above 3% for the first time since 1996, while the 30-year JGB yield reached 4.2%—roughly four times the Bank of Japan’s policy rate. European markets are also under pressure: Germany’s 10-year Bund yield rose to 3.38%, its highest level since 2011; the French-German sovereign spread widened to 88 basis points; and the Italian-German spread reached 84 basis points. Both spreads remain at elevated levels.

The message behind these figures is straightforward: long-dated bonds are being repriced. Investors are demanding higher yields to bear longer-duration risk. In particular, repeated new highs in 30-year yields suggest growing market concern over long-term inflation, fiscal stress, and term premia.

For central banks, the most direct response is typically to raise interest rates. Rate hikes push up short-end yields, which can help anchor inflation expectations and potentially contain or stabilize long-end yields. Bloomberg interest-rate futures pricing indicates a 99% probability of a European Central Bank rate hike on September 10, a 98% probability of a Bank of Japan rate hike on September 18, and a 53% probability of a Federal Reserve rate hike on September 16.

An important feature of the current global market environment is therefore that major economies are broadly tilting toward tighter monetary policy, while expectations for the Federal Reserve remain the most uncertain.

Federal Reserve Uncertainty, Dollar Pressure

In theory, rising yields and growing expectations of rate hikes should support the dollar. This time, however, the picture is far more complicated because policy signals within the United States are not aligned.

Trump has previously stated his support for lower interest rates in highly visible terms. That has prompted more questions about the Federal Reserve’s policy independence and the future path of U.S. interest rates. In the short run, lower rates could help ease pressure from rapidly rising fiscal deficits and interest expenses. But from the perspective of confidence in U.S. dollar assets, international investors are also watching Treasury yields, inflation trends, and whether the Fed remains capable of independently managing risk.

This is the market’s central contradiction. Rising Treasury yields are not always negative. If higher yields reflect stronger economic growth and improved corporate earnings, the bond market can still be viewed as healthy. But if the move is driven primarily by rising long-term inflation expectations, fiscal concerns, and an expanding term premium, then higher yields instead imply that investors are demanding greater compensation for risk. That is not favorable for dollar assets.

At present, the Treasury market is showing a steepening structure, with relatively lower short-end yields and higher long-end yields. The market is weighing two competing forces. On the one hand, U.S. corporate growth remains supported. On the other, persistently rising long-term yields are weighing on valuations and risk appetite. It remains unclear whether U.S. equities will continue to price in corporate growth or begin placing greater emphasis on the pressure created by higher yields.

From the perspective of the yield-curve structure, further rate hikes appear to be the more reasonable choice. If the Fed hikes, short-end yields would rise while long-end yields could stabilize, potentially easing the abnormal steepening of the curve. In the near term, this could trigger portfolio repositioning and a pullback in U.S. equities. Over a longer horizon, however, if the market regains confidence that the Fed remains committed to controlling inflation and preserving monetary credibility, confidence in dollar assets could actually be restored.

The problem is that the market still cannot determine whether the Fed will hike, nor whether any hike would be a one-off policy move or the start of another sustained tightening cycle. Precisely because the U.S. policy path remains unclear while expectations of BOJ tightening are more definitive, further yen appreciation could become the most direct force weighing on the dollar.

If the BOJ raises rates as expected and USD/JPY breaks decisively below the important 151 area, the dollar index could fall through key support under the combined effect of fading Fed-hike expectations and pressure from yen appreciation. Under this scenario, the dollar index could have room to decline by up to another 10 points.

If the dollar weakens, Treasuries remain under pressure, and U.S. equities fall, the market could face a “triple decline” in the dollar, U.S. Treasuries, and U.S. stocks. In that scenario, gold and commodities may instead find support.

Gold’s setup is particularly nuanced. Gold remains in a daily-chart downtrend, but its short-term ascending trendline has not been broken. Previously, bears had an opportunity to extend their advantage following the nonfarm payrolls data. However, Trump’s pushback against rate-hike expectations, together with the yen’s appreciation pressure on the dollar, has made it more difficult for gold bears to extend the move.

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Oil and China Demand

Beyond the yen, crude oil is also adding a new layer of uncertainty to the market.

One important reason oil prices had not risen more sharply earlier was weak Chinese crude-oil demand. Bloomberg data showed that China’s crude-oil imports had fallen to a nine-year low in recent months. Soft demand meant that, although oil prices had a fundamental basis for rising, they lacked a stronger catalyst.

More recently, however, the spread between Shanghai crude and Brent crude has rebounded, suggesting that crude prices in China are strengthening.

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If China’s crude-oil imports rise accordingly, oil prices could move higher still.

Stronger oil does not simply imply a hotter energy market. Higher oil prices can reinforce inflation expectations, push up global bond yields, and make the U.S. inflation and interest-rate challenge more difficult. Against a backdrop of insufficiently decisive Federal Reserve policy, higher oil prices, rising yields, and a weaker dollar could become mutually reinforcing forces.

Therefore, if WTI crude-oil futures make a decisive break above the key 93.5 resistance level, it may be appropriate to take profits on the existing calendar-spread strategy.

This Week’s Approach

Overall, continued yen appreciation could indeed become this week’s most important risk trigger. But this scenario is not without countervailing forces.

Japan runs a substantial trade deficit with the United States. As the yen appreciates, pressure on export competitiveness and the terms of trade will gradually become more apparent. Even if USD/JPY approaches the 151 area, that prior-high zone may act as resistance to further yen appreciation and could even trigger renewed downward pressure on the yen. In other words, 151 could serve either as a trend-confirmation point or as the level where bullish and bearish forces re-engage in a more intense battle.

That is exactly why determining this week’s direction is so difficult. The yen may continue to drive the dollar lower; oil demand may push yields higher; gold may rebound as the dollar retreats; and U.S. equities may face pressure from elevated interest rates. Yet every link in this chain remains vulnerable to reversals arising from policy developments, technical levels, and investor positioning.

From a strategy perspective, an options-selling and relative-value approach is more appropriate than placing large directional bets through futures. Gold’s direction remains unclear, and selling puts at lower levels may be better suited to the current market than directly chasing the downside.

For gold, I would continue to favor selling puts around the 4,000 level. For U.S. equities, Nasdaq futures remain above their 20-week moving average, suggesting near-term downside support. At the same time, higher yields are creating resistance on the upside, which is also consistent with a range-bound market. Therefore, I would continue to consider selling QQQ puts below the prior low of 661.

The previously discussed short-put ideas in XLF and Nvidia can also remain in place. In addition, given that the U.S.-Iran situation remains unresolved, the likelihood of a near-term decline in refining cracks appears limited. It may therefore be worth selling out-of-the-money puts on refining stocks, such as puts on Marathon Petroleum below its prior daily-chart low.

The short-put trades and crude-oil calendar spreads discussed previously have already generated some gains.

The most worthwhile action this week may not be to trade aggressively, but to wait for direction to truly emerge: watch the Bank of Japan’s policy decision, monitor the yen’s behavior around 151, assess whether Treasury yields continue moving higher, and wait for Friday’s CPI data to provide a fresh signal on inflation.

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