Aug 8 2024: The yen showed volatility on Thursday following a sharp decline the previous day, amid a turbulent week where investor sentiment remains fragile. Market participants are evaluating the potential unwinding of popular carry trades and the future direction of Japan’s central bank policy.
The yen was last 0.4% stronger at 146.02 per dollar, rebounding after a 1.6% drop on Wednesday. This decline followed comments from Bank of Japan Deputy Governor Shinichi Uchida, who downplayed the likelihood of a near-term rate hike.
Earlier in the week, the yen had surged to a seven-month high of 141.675 per dollar, a notable recovery from the 38-year lows it hit in early July. This movement was triggered by a surprise rate hike from the BOJ and concerns about a potential recession following soft U.S. jobs data, which prompted investors to exit carry trades—where the yen is borrowed at low rates to invest in higher-yielding assets in dollars.
A summary of the BOJ’s July policy meeting revealed mixed opinions among board members, with some advocating for further rate increases. This contrast with Uchida’s comments highlights the central bank’s complex balancing act and is likely to keep market sentiment uncertain.
“Although the BOJ may have paused for now, it is likely to continue moving towards policy normalization in the coming months,” said Vasu Menon, managing director of investment strategy at OCBC. “It may be premature to celebrate as markets remain susceptible to negative news and global uncertainties.”
ANZ Bank’s chief economist Sharon Zollner and strategist David Croy noted that even if the Federal Reserve reduces rates significantly and the BOJ raises them again, Japanese rates will still lag behind their U.S. counterparts. This suggests that carry trades may persist, though we might see further fluctuations in the dollar/yen pair as investors adjust their risk positions.
The Swiss franc, another currency frequently used for carry trades, was slightly stronger at 0.859 per dollar after a more than 1% drop in the previous session.
The yen’s fluctuations have pushed the dollar index, which measures the U.S. currency against six rivals, to 103.03, approaching a seven-month low of 102.15 reached on Monday. The euro held steady at $1.09315, while sterling traded at $1.26925, close to a one-month low hit on Tuesday.
Market expectations for a Federal Reserve rate cut in September are mixed, with traders anticipating a 50 basis-point reduction, though a 25 basis-point cut is also possible. This comes after Monday’s brief period where a 50-bps cut and even an emergency rate reduction before September seemed likely, although these odds have since diminished as market conditions stabilize.
Investor attention will now turn to the U.S. consumer price inflation report for July and remarks by Fed Chair Jerome Powell at the Jackson Hole Economic Policy Symposium from August 22-24.
“Investors should prepare for a bumpy ride,” said OCBC’s Menon, emphasizing that significant economic data is expected before the next Fed meeting, which could influence market expectations.
The Australian dollar was up 0.51% at $0.6552, while the New Zealand dollar remained steady at $0.59975.
