Market awaiting headline inflation data in the US
The Japanese yen fell in the Asian market on Tuesday against a basket of major and minor currencies, extending its losses for the second consecutive day against the US dollar, about to touch the lowest level in two weeks, due to the decline in the prospects of additional increases in Japanese interest rates this year, especially after the recent comments of the deputy governor of Japan Bank.
In order to re-price existing probabilities around US interest rates, investors await this week the release of key US inflation data for July, which illustrates the extent to which inflationary pressures have reached Federal Reserve policymakers.
Japanese yen exchange rate today: The dollar rose against the yen by about 0.2% to (147.52¥), from the opening price of today’s trading at (147.29¥), and recorded a low at (146.91¥).
The Japanese yen ended Monday’s trading down: 0.4% against the US dollar, the fourth loss in the last five days, and hit a two-week low of 148.22 yen.
Japan Bank Deputy Governor Shinichi Uchida: said last week that the central bank will not raise interest rates when financial markets are unstable
Given the sharp :volatility in domestic and external financial markets, it is necessary to maintain current levels of monetary easing for the time being.
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Japanese interest
The above comments reduced the odds of Japan Bank raising interest rates for the third time this year, which is expected to reduce pressure on the breakup of Curry Trade deals.
American interest
According to CME Group’s Feed Watch: pricing the probability of a 50 basis point cut in US interest rates at the September meeting is currently stable at 49%, and the ِpricing of the odds of a cut by 25 basis points at 51%.
In order to reprice the above contracts, investors await the release of producer and consumer price data for July on Tuesday and Wednesday, which are the main indicators for measuring inflation in the United States.
Investors have sold the yen relentlessly for several months, as interest rates are lower in Japan than anywhere else especially the United States, which has led to a build-up of bearish positions in the Japanese currency that some have had to dismantle.
The interest rate gap between the US and Japan has created a highly lucrative trading opportunity, with traders borrowing yen at low rates to invest in dollar-priced assets for a higher return, known as the ‘Curry Trade’ trade.
Following decisions by the Bank of Japan and the Federal Reserve in late July, the interest rate gap between Japan and the United States narrowed to 525 basis points in favor of US interest rates as the smallest gap since July 2023.
In light of the current possibilities, the gap is expected to narrow to 500 basis points in September, with Japanese interest rates fixed unchanged.
JPMorgan (NYSE:JPM) analysts revised their forecast for the yen to 144 against the dollar by the second quarter of next year, saying this means the yen will consolidate in the coming months and see reason to be optimistic about the dollar’s medium-term outlook.
“Trading deals have erased gains made so far in the year; we estimate that 65-75% of positions have been liquidated.
Implied volatility on the yen, denominated in yen options, also declined. Volatility rose overnight to 31% on August 6 but has now fallen to around 5%.
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