The Japanese yen continued its gradual decline against the US dollar today, amid a calm trading atmosphere due to a public holiday in Japan. The decline in the Japanese currency reflects continued market divergence regarding the likelihood of a significant rate cut by the Federal Reserve over the next month.
The cautious sentiment comes on the heels of a volatile week that saw a broad sell-off in the currency and equity markets due to concerns about the U.S. economy and the Japan Bank’s signal of a less accommodative monetary policy stance.
Despite the quieter end to last week, supported by strong U.S. jobs data on Thursday that eased expectations of U.S. interest rate cuts, investors remain not fully convinced of the Fed’s ability to delay monetary easing. The market is pricing a total of 100 basis points of interest rate cuts by the end of the year, CME Group’s FedWatch notes, a sentiment usually associated with recession expectations.
Expectations for upcoming economic indicators are rising, with producer and consumer price data in the United States due on Tuesday and Wednesday, respectively. The figures are crucial as markets also look ahead to the global central bankers meeting in Jackson Hole next week and NVIDIA’s earnings later in the month, which could further weigh on investor sentiment.
According to one currency strategist analyst at OCBC in Singapore, the current market dynamics are the result of investors adjusting their positions ahead of US inflation data. Mizuho analysts also advised paying attention to upcoming jobs and inflation data ahead of the Fed’s September meeting, describing the current situation as “strictly balanced.”
On the currency front, the dollar rose to 147.15 yen, up 0.4%. The euro was trading at $1.0920, while the dollar index remained flat at 103.18. The Australian dollar showed a slight rise to $0.6584, and the New Zealand dollar traded at $0.6015, slightly below last week’s peak recorded last week, which reached a three-week peak.
The Reserve Bank of New Zealand is expected to maintain its key interest rate at 5.50% in its monetary policy review on Wednesday.
Last week’s market volatility last week’s market volatility included a marked decline in yen swapping trade, which was a popular strategy among investors. The decline followed Japan intervention, the Japan Bank’s rate hike, and the subsequent reversal of yen-denominated swapping deals, which sent the USD/JPY pair down by 20 yen from July 3 to August 5.
The latest data from the US Commodity Futures Trading Commission and the London Commodity Futures Exchange revealed that leverage funds have reduced their net short positions on the yen to their smallest size since February February 2023. The yen had reached its strongest point since Jan. 2, January at 141.675 against the dollar on Monday, but has fallen 4% against the dollar this year.
JPMorgan analysts updated their forecast for the yen to 144 against the dollar by the second quarter of next year, signaling a period of consolidation for the currency in the coming months. They also expressed positive expectations for the prospects
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