Source – zawya.com
Resumption of Yen Decline:
The Japanese yen resumed its gradual decline against the U.S. dollar on Monday after a volatile week that saw significant fluctuations in global markets. The previous week’s turmoil was largely driven by concerns over the U.S. economy and the Bank of Japan’s aggressive monetary stance. Despite the instability, the Japanese yen’s decline continued as investors assessed the likelihood of a substantial interest rate cut by the U.S. Federal Reserve in the coming month.
The anticipation of upcoming U.S. economic data, particularly producer and consumer price indices, kept investors on edge, contributing to the cautious market sentiment. Last week ended on a calmer note, largely due to stronger-than-expected U.S. jobs data, which led to a reduction in market expectations for aggressive Federal Reserve interest rate cuts this year.
Market Sentiment and Expectations:
As global investor sentiment showed signs of recovery, market analysts, particularly those from MUFG, suggested that expectations for significant Federal Reserve rate cuts might continue to diminish if the positive sentiment persisted. However, despite the calmer outlook, the CME Group’s FedWatch tool indicated that investors were still pricing in 100 basis points of rate cuts by the end of the year. This cautious optimism was further tempered by the anticipation of key U.S. inflation data, scheduled for release on Tuesday and Wednesday, which could potentially shift market expectations.
Christopher Wong, a currency strategist at OCBC Bank in Singapore, noted that the current market activity seemed to be a result of investors adjusting their positions in anticipation of the U.S. inflation data. As the dollar strengthened, it traded at 147.315 yen, marking a 0.5% increase. Meanwhile, the euro stood at $1.091850, and the dollar index remained flat at 103.21. The British pound experienced a slight dip, trading at $1.2764.
Impact of the Yen Carry Trade:
The Japanese markets, in particular, were significantly impacted by the unwinding of the yen carry trade, a popular investment strategy involving borrowing Japanese yen at low costs to invest in higher-yielding assets. The violent sell-off in the dollar-yen pair, which occurred between July 3 and August 5, was triggered by Japan’s intervention, a rate hike by the Bank of Japan, and the subsequent unwinding of yen-funded carry trades.
This led to a sharp decline of 20 yen in the pair. Data from the U.S. Commodity Futures Trading Commission and LSEG revealed that leveraged funds had reduced their net short positions on the yen to the smallest level since February 2023. Despite the recent strength of the yen, which reached its highest level since January 2 at 141.675 per dollar last Monday, the currency remains down approximately 4% against the dollar for the year.
Analysts at J.P. Morgan have revised their forecast for the Japanese yen, predicting it will reach 144 per dollar by the second quarter of next year. They also suggested that the yen is likely to consolidate in the coming months as carry trades have erased much of their year-to-date gains, with an estimated 65-75% of positions being unwound.
