By Vidya Ranganathan
SINGAPORE (Reuters) – The yen weakened slightly against the dollar in trade disrupted by a Japanese public holiday on Monday, with market participants still ambivalent about the chances of a sharp rate cut by the Fed next month.
The respite follows a tumultuous week that began with a massive fall in currencies and stock markets, fueled by concerns about the U.S. economy and the Bank of Japan’s aggressive policy.
Last week ended more calmly, as better-than-expected U.S. jobs data led markets to reduce bets that the Federal Reserve would cut interest rates this year.
Still, investors are not convinced the Fed can afford to go slowly in cutting rates, and their forecast of 100 basis points of easing by year-end, according to CME Group’s FedWatch tool, is consistent with a recession scenario.
This makes markets highly vulnerable to data and events, including US producer and consumer price figures due on Tuesday and Wednesday respectively this week, the global central bankers meeting in Jackson Hole next week and even earnings from artificial intelligence darling Nvidia later this month.
“It’s more a matter of the market rallying a bit ahead of the US inflation data,” said Christopher Wong, currency strategist at OCBC Bank in Singapore.
The dollar was trading at 146.87 yen, up 0.2 percent from levels seen in late U.S. trading on Friday. The euro was trading at $1.0918 and the dollar index was steady at 103.18.
A week ago, the euro climbed to $1.1009 for the first time since January 2.
The Australian dollar barely edged higher on Monday, at $0.6577, while the New Zealand dollar remained below last week’s three-week high of $0.6035. It was at $0.6009.
The Reserve Bank of New Zealand reviews policy on Wednesday and is expected to keep its key interest rate unchanged at 5.50%.
WEAR RELAX
Wall Street ended higher last week, with futures on the E-mini S&P 500 closing virtually unchanged for the week after a staggering 4.75% drop on Monday, while longer-dated Treasury yields declined.
Markets, particularly in Japan, were shaken last week by the abandonment of the popular yen carry trade, which involves borrowing yen at low cost to invest in other currencies and assets that offer higher returns.
The sharp fall in the dollar-yen pair between July 3 and August 5, triggered by Japanese intervention, a rate hike by the Bank of Japan and then an unwinding of yen-financed carry trades, led to a fall of 20 yen.
Leveraged funds’ position in the Japanese yen narrowed to the smallest net short position since February 2023 over the past week, data from the U.S. Commodity Futures Trading Commission and LSEG showed Friday.
The yen hit its highest level since January 2 on Monday, at 141.675 per dollar. It is still down 3.8% against the dollar since the start of the year.
JP Morgan analysts revised their forecast for the yen to 144 per dollar by the second quarter of next year, saying that implied the yen would consolidate in the coming months and that they saw reasons to be optimistic about the dollar’s medium-term outlook.
“Carry trades have erased year-to-date gains; we estimate 65-75% of positions are unwound,” they said in a note Saturday.
Implied yen volatility, measured in yen options, also declined. Overnight volatility had peaked at 31% on August 6, but has now fallen to around 5%.
(Reporting by Vidya Ranganathan in Singapore; Editing by Jamie Freed)
