THE yen hit choppy trading on Thursday (Aug 8) after a sharp drop the day before in a volatile week in which investors have had to digest the unwinding of popular carry trades and how Japanese monetary policy might evolve.
The yen swung between losses of 0.14 per cent and a gain of 0.85 per cent, having slid 1.6 per cent on Wednesday, after the Bank of Japan’s (BOJ) deputy governor Shinichi Uchida played down the chance of a near-term hike in interest rates that would typically boost the currency.
The yen started the week by scaling a seven-month high of 141.675 per US dollar, a far cry from the 38-year lows where it traded in early July, after soft US jobs data last week stoked recession worries and roiled investors.
A surprise rate hike from the BOJ last week also forced investors to bail out of carry trades, in which they borrow the yen at low rates to invest in dollar-priced assets for higher returns. This unwinding gave the yen a boost.
A summary of opinions voiced at the BOJ’s July policy meeting showed, on Thursday, that some board members cited a need to keep raising interest rates, with one saying they should eventually be increased to at least around 1 per cent.
The contrasting opinions from the summary and Uchida on whether the BOJ will continue to raise rates, or pause as a result of market volatility, underscore the delicate task facing the central bank and will likely keep investors skittish.
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Some analysts believe this unwinding in the carry trade may have further to run, and is possibly only halfway there, which could add to volatility.
Even if the US Federal Reserve did deliver a steep rate cut, as most traders are expecting in September, and the BOJ another increase, there would still be an incentive to use the yen to fund other trades.
“There could be new yen shorts. In the same way that people were bargain hunting in the S&P on Tuesday, they were very likely people bargain hunting in dollar/yen,” said Rabobank strategist Jane Foley.
“There will be people out there who don’t see a reason to expect it to unwind further and that’s what makes a market.”
Indeed, the options market shows that demand for protection against big price swings in the yen over the next month has reached its highest since early 2023 this week.
The Swiss franc, another currency that was used to fund carry trades and that benefited from the unwinding momentum earlier this week, was up 0.6 per cent at 0.8569 per US dollar, after dropping more than 1 per cent on Wednesday.
The sharp moves in the yen pushed the dollar index, which measures the US currency against six others including the yen, down modestly to 103.08, above Monday’s seven-month low of 102.15.
The euro was steady at US$1.09275, as was the sterling at US$1.2693, near one-month lows.
Traders currently attach an 86 per cent chance of the Fed cutting rates by half-a-point at its next meeting in September as the economy slows, but are also pricing in a 26.5 per cent chance of a smaller 25 basis point (bp) reduction, according to the CME Group’s FedWatch tool.
On Monday, they had at one point fully priced in a 50-bps cut and had even started pricing in the possibility of an emergency rate reduction before the September meeting, though those odds have eased since then, as markets have stabilised.
Investor focus will now be on the US consumer price inflation report for July due next week, as well as comments by Fed chair Jerome Powell at the central bank’s Jackson Hole Economic Policy Symposium on Aug 22 to Aug 24.
“Investors need to brace for a bumpy ride,” noted Vasu Menon, managing director of investment strategy at OCBC.
The Australian dollar rose 0.5 per cent to US$0.6553, while the New Zealand dollar held at US$0.5994. REUTERS
