The US dollar has been trading in a broader risk-on environment after a US-Iran agreement to reopen the Strait of Hormuz eased near-term concerns over energy supply. That shift supported a broad move across equities, bonds and currencies, while leaving FX pricing tightly linked to shifts in global risk sentiment.
Currency markets remain highly sensitive to policy divergence, prompting a reassessment of USD direction alongside JPY and KRW. Focus is centred on central bank decisions, the durability of global growth and the implications of higher-for-longer rate risks, with carry trades and potential intervention risks also in view. Persistent concerns over inflation, rates and capital flows continue to shape positioning even as sentiment improves.
Energy Volatility And Shifts In Risk Sentiment
With the geopolitical heat turned down following the Strait of Hormuz agreement, we are seeing a clear risk-on sentiment taking hold. Energy-related volatility is likely to decrease, making it a good time to consider selling options on oil futures to collect premium. For instance, we note that the CBOE Crude Oil Volatility Index (OVX) has already dropped 15% in the last week, settling near its lowest level this year.
Central Bank Policy Divergence And Currency Opportunities
The policy differences between central banks are now the main event, especially between the U.S. and Japan. With the Federal Reserve holding its key rate steady at a projected 5.25% in its last meeting and the Bank of Japan staying near zero, the dollar-yen carry trade looks very attractive. We believe using call options on the USD/JPY pair is a smart way to gain exposure to further upside in the coming weeks.
However, we must be careful about intervention risk from Japanese authorities, who have acted before when the yen weakens too quickly. We remember the sharp yen rallies in late 2022 and 2024 when they stepped in to support their currency. Buying cheap, out-of-the-money puts on USD/JPY could serve as a low-cost insurance policy against a sudden reversal.
This positive risk environment also makes currencies like the South Korean Won more appealing. Given that South Korea’s latest trade surplus figures beat expectations by 8%, showing strong export growth, we see potential strength in the KRW. We are exploring strategies that benefit from a stronger won, particularly against the weakening Japanese yen.
