July 25 2024: The yen climbed to its strongest level against the dollar in 2-1/2 months on Thursday and reached multi-month highs against other currencies ahead of next week’s Bank of Japan (BOJ) meeting, as yen carry trades were unwound and market sentiment deteriorated.
The dollar, euro, sterling, and other major currencies dropped more than 1% against the yen in mid-morning Asian trade before recovering some losses. Analysts attributed the yen’s sharp rise to the abandonment of short yen positions ahead of the BOJ’s July meeting, where a potential rate hike is being considered.
Sources indicated that the BOJ is likely to discuss raising interest rates next week and unveiling a plan to significantly reduce bond purchases in the coming years, showing its intent to gradually unwind its extensive monetary stimulus.
Against the dollar, the yen last rose 0.7% to 152.81, after earlier reaching its highest since May 3 at 152.23.
The euro fell 0.7% to 165.59 yen, while sterling and the Australian dollar lost 0.85% and 1.3% against the yen, respectively.
Khoon Goh, head of Asia research at ANZ, stated, “The speculative community had very large short yen positions, and as the unwinding occurred, many stops were triggered, resulting in a significant unwinding of these short positions.”
The yen also received safe-haven support as risk sentiment declined following a sharp drop in Wall Street, driven by a sell-off in major technology stocks.
Tony Sycamore, a market analyst at IG, commented, “It’s a perfect storm at this moment. There’s an unwind in the tech trade, the carry yen trade, and the Nikkei is also unwinding.”
The risk aversion impacted the Australian and New Zealand dollars, which were already under pressure from weakening commodity prices.
The Australian dollar fell 0.55% to $0.6545, while the kiwi dropped to a 2-1/2-month low of $0.5913.
Both currencies were on track for weekly declines of 1.5% and 1.3%, respectively.
Elsewhere, the euro remained steady at $1.0839, while sterling decreased by 0.12% to $1.2890.
Recent PMI surveys showed stalled business activity growth in the eurozone for July, while British business activity increased.
U.S. business activity hit a 27-month high in July, although firms faced challenges maintaining higher prices for goods and services.
Analysts from Capital Economics maintained their view that the ECB, BoE, and Fed will cut interest rates in September.
Traders are also watching U.S. second-quarter growth figures due later on Thursday, though the outcome is unlikely to significantly change expectations for Federal Reserve rate cuts this year, with a September cut already fully priced in.
The dollar index fell slightly to 104.28, largely due to the yen’s rise.
In China, the yuan increased 0.15% to 7.2533 per dollar.
The Chinese central bank conducted an unscheduled lending operation at significantly lower rates, aiming to provide greater monetary stimulus to support the struggling economy.
Additionally, major state-owned banks in China announced cuts in deposit rates, marking the first broad reduction since December last year.
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