Key points
The yen (USDJPY) dominated currency markets this month, climbing to a near three-month high of 151.945 per dollar on Thursday. This is a major shift from its 38-year low of 161.96 per dollar at the start of the month. By Friday, the yen was at 153.66, set for a 2.5% rise for the week.
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This large move follows suspected interventions by Tokyo in early July, which led to an unwinding of profitable carry trades. Traders had borrowed the yen at low rates to invest in dollar-priced assets for higher returns. The interventions caught traders off guard, leading to a swift adjustment.
The rapid yen rally suggests a potential for consolidation soon. However, with declining risk assets and data suggesting potential U.S. rate cuts, the yen could appreciate further.
Investor attention is now on U.S. personal consumption expenditure (PCE) data, the Federal Reserve’s favoured measure of inflation. The PCE data is expected to show a 0.1% monthly increase. The Fed meets next week and is expected to maintain current rates, but markets are fully pricing in a rate cut in September.
The Bank of Japan (BOJ) may raise rates next week, with markets pricing a 64% chance of a 10 basis point hike. Data showed core inflation in Japan’s capital accelerating for a third straight month in July, keeping expectations of a near-term interest rate hike alive. However, the yen’s surge might give the BOJ more time.
The pressure on the BOJ to tighten policy has reduced. Nonetheless, the BOJ is still expected to announce details of their balance sheet reduction.
The dollar index (DXY), which measures the U.S. unit against six rivals, was little changed at 104.29. The euro (EURUSD) was slightly stronger at $1.08575. The dollar found support after data showed the U.S. economy expanded faster than expected, with inflation slowing in the second quarter.
The U.S. economy remains resilient even with restrictive interest rates. The first rate cut is expected in November, requiring a long string of lower inflation readings before easing rates.
Sterling (GBPUSD) was 0.12% higher at $1.2865 but below the one-year high of $1.3044 hit last week. Traders are pricing a 50% chance of the Bank of England cutting rates next week, with markets anticipating 51 basis points of cuts this year.
The Australian dollar (AUDUSD) and the New Zealand dollar (NZDUSD), seen as risk proxies, were down nearly 2% for the week. On Friday, both currencies were slightly higher, with the Aussie up 0.23% at $0.6552 and the kiwi up 0.13% at $0.5891.
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