Yen slips as markets brace for US inflation data

By Vidya Ranganathan

SINGAPORE (Reuters) – The yen was slightly weaker against the dollar in thin trading on Monday on the Japanese holiday, with market participants still ambivalent about the chances of a big Fed interest rate cut next month.

The respite follows a tumultuous week that began with a massive sell-off in currencies and stock markets, driven by concerns about the US economy and the Bank of Japan’s balance sheet.

Last week ended more calmly, with Thursday’s stronger-than-expected US jobs data leading markets to reduce bets on a Federal Reserve rate cut this year.

Still, investors remain unconvinced that the Fed can afford to go slow with rate cuts, and their price of 100 basis points of easing by the end of the year, according to CME Group’s FedWatch tool, is consistent with a recessionary scenario.

This leaves markets highly vulnerable to data and events, particularly the US producer and consumer price figures coming up this week on Tuesday and Wednesday respectively, the meeting of global central bankers in Jackson Hole next week and even earnings from artificial intelligence darling Nvidia later this month.

“It’s more a case of the market picking up 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 late U.S. levels on Friday. The euro settled at $1.0918 and the dollar index was flat at 103.18.

A week ago, the euro rose to $1.1009 for the first time since January 2.

The Aussie barely rose to $0.6577 on Monday, while the New Zealand dollar remained below last week’s three-week high of $0.6035. It was last at $0.6009.

The Reserve Bank of New Zealand is reviewing policy on Wednesday and is expected to keep its key cash rate unchanged at 5.50%.

CARRY UNWIND

Wall Street ended last week with E-mini S&P 500 futures almost unchanged on the week after a steep 4.75% decline last Monday, while longer-dated Treasury yields edged lower.

Markets, particularly Japan’s, were rocked last week by an exit from the wildly popular yen trade, which involves borrowing the yen at a low cost to invest in other currencies and assets that offer higher returns.

The 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 an exit from yen-backed carry trades, sent it down 20 yen .

Leveraged funds’ positions in the Japanese yen fell to their smallest net short position since February 2023 in the past week, U.S. Commodity Futures Trading Commission and LSEG data showed on Friday.

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The yen hit its strongest level since Jan. 2 at 141.675 per dollar last Monday. This year, it is still down 3.8% against the dollar.

JP Morgan analysts revised their forecast for the yen to 144 per dollar by the second quarter of next year and said this implied a strengthening of the yen in the coming months and saw reason to be bullish on the greenback’s medium-term outlook.

“Carry trades have erased year-to-date gains; we estimate that 65-75% of the positioning is cancelled,” they said in a note on Saturday.

Implied yen volatility, as measured in yen options, also declined. Overnight volatility spiked as high as 31% on August 6, but is now down to around 5%.

(Reporting by Vidya Ranganathan in Singapore; Editing by Jamie Freed)