Yen continues descent, markets calm before U.S. inflation figures

The yen resumed its gradual fall against the dollar on Monday after tumultuous trading last week, while investors assessed the chances of a substantial Fed rate cut next month ahead of a series of U.S. economic reports.

 

This follows a chaotic week that began with a major sell-off across currencies and stock markets, driven by concerns over the U.S. economy and the Bank of Japan's aggressive stance.

 

Last week concluded more calmly, with Thursday's stronger-than-expected U.S. employment data prompting markets to scale back expectations for Federal Reserve interest rate cuts this year.

 

"If global investor risk appetite keeps improving in the upcoming week, it's probable that market expectations for Fed rate cuts will continue to be reduced," currency analysts at MUFG noted in a report.

 

Nonetheless, investors are predicting 100 basis points of Fed cuts by year-end, according to the CME Group's FedWatch tool, and U.S. producer and consumer price index figures set for release on Tuesday and Wednesday could influence market views. "It's more about the market aligning itself a bit ahead of the U.S. inflation data," stated Christopher Wong, currency strategist at OCBC Bank in Singapore.

 

The dollar was valued at 147.68 yen, up 0.7%. The euro was at $1.0938 and the dollar index held steady at 103.12. The British pound slipped 0.2% to $1.279.

 

A week earlier, the euro climbed as high as $1.1009 for the first time since January 2.

 

Markets, particularly Japan's, were shaken last week by the reversal of the widely-used yen carry trade, which entails borrowing yen at low interest rates to invest in other higher-yielding currencies and assets.

 

The sharp sell-off in the dollar-yen pair between July 3 and August 5, triggered by Japan's intervention, a Bank of Japan rate hike, and then the unwinding of yen-financed carry trades, caused it to drop 20 yen.

 

Leveraged funds' positions on the Japanese yen shrank to the smallest net short positions since February 2023 in the past week, according to U.S. Commodity Futures Trading Commission and LSEG data released on Friday.

 

The yen hit its highest level since January 2 at 141.675 per dollar last Monday. It remains down around 4% against the dollar so far this year.

 

JPMorgan analysts adjusted their forecast for the yen to 144 per dollar by the second quarter of next year, suggesting the yen would stabilize in the upcoming months.

 

"Carry trades have erased year-to-date gains; we estimate 65-75% of positions have been unwound," they stated in a report on Saturday.