The Japanese yen fell in the Asian market on Monday at the beginning of the week against a basket of major and minor currencies, to move in negative territory, 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 the Japan Bank.
In order to reprice the existing probabilities around US interest rates, investors await this week, the release of key inflation data in the United States for July, which shows the extent to which inflationary pressures have reached Federal Reserve monetary policymakers.Price outlook • Japanese yen exchange rate today: The dollar rose against the yen by about 0.5% to (147.12¥), from the opening price of today’s trading at (146.45¥), and recorded a low at (146.45¥).
The Japanese yen ended Friday’s trading up 0.4% against the US dollar, in the first gain in the last four days, thanks to a slowdown in long-term US yields.
The yen lost 0.1% last week against the dollar, the first weekly loss in a month and a half, due to corrections and profit-taking from a seven-month high of 141.68 yen per dollar.
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.
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 dismantling of Curry Trade deals.
American interest
According to CME Group’s FeedWatch: pricing the odds of a 50 basis point cut in US interest rates at the September meeting are currently stable at 46%, and the pricing of the odds of a cut by about 25 basis points at 54%.
In order to reprice the above contracts, investors await this week the release of producer and consumer price data for July, which are the main indicators for measuring inflation in the United States.Interest rate gapInvestors have sold the yen relentlessly for several months, due to lower interest rates in the Japan than anywhere else especially the United States, which led to the accumulation of bearish positions in the Japanese currency that some were forced 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.
Forecast for the performance of the Japanese yen
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 long-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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