The yen is on track for its most substantial weekly gain in nearly three months, driven by a reversal in long-held bearish positions against the currency. This shift comes as traders reassess their strategies in anticipation of critical U.S. inflation data, which could influence future rate cut expectations.
This month, the yen has significantly strengthened, reaching a near three-month peak of 151.945 per dollar on Thursday, a sharp recovery from its 38-year low of 161.96 per dollar at the beginning of July. This dramatic shift follows suspected interventions by Tokyo, which disrupted traders and prompted the unwinding of lucrative carry trades. In these trades, investors had been borrowing yen at low interest rates to fund higher-yield investments in dollar-denominated assets.
On Friday, the yen was trading at 153.625, marking a 2.3% increase for the week. This represents its largest weekly gain since late April to early May. The yen’s rise has also been fueled by a global stock market downturn, which has driven investors towards safer assets like the yen.
James Athey, a fixed income portfolio manager at Marlborough Investment Management, suggested that while the rapid appreciation of the yen might lead to a period of consolidation, further gains are likely. “The acceleration in the yen rally implies we may see some stabilization soon, but with risk assets losing their appeal and indications of forthcoming rate cuts, the yen could continue to strengthen,” Athey noted.
Attention is now focused on the U.S. personal consumption expenditures (PCE) data, the Federal Reserve’s preferred inflation measure. The PCE is projected to show a 0.1% increase on a monthly basis.
The Federal Reserve’s upcoming meeting next week is anticipated to result in no change to the current interest rates. However, markets are already forecasting a rate cut in September, with expectations of 66 basis points of easing by year-end.
Conversely, the Bank of Japan might raise rates in its next meeting, with a 64% probability of a 10 basis point increase, according to market expectations. Recent data revealed that core inflation in Tokyo accelerated for the third consecutive month in July, sustaining speculation about a potential rate hike.
Despite the yen’s recent surge, analysts suggest that this may afford the Bank of Japan additional time before making policy changes. Ben Bennett, Asia-Pacific investment strategist at Legal and General Investment Management, stated, “The urgency for the Bank of Japan to tighten policy has diminished, but an announcement regarding balance sheet reductions, indicating some form of quantitative tightening, is still anticipated.”
The U.S. dollar index, which gauges the greenback against six major currencies, remained steady at 104.35. The euro inched up to $1.0853 but faced a 0.35% decline for the week, marking its steepest weekly drop since early June.
After a data release on Thursday showed stronger-than-expected economic growth and a slowdown in inflation in the U.S., the dollar managed to stabilize. The Australian dollar increased slightly to $0.65475, recovering from a near three-month low reached on Thursday. Nonetheless, it is down 2% for the week, representing its worst performance since November 2023. The New Zealand dollar also fell, trading at $0.5888 and on track for a 2% weekly decline.
