By Vidya Ranganathan
SINGAPORE (Reuters) – The yen continued its slow decline against the dollar in thin trade due to a holiday in Japan on Monday, as market participants remained uncertain about the prospects of a significant interest rate cut by the U.S. Federal Reserve next month.
The break comes after a turbulent week that began with widespread selling across currencies and stock markets, driven by concerns about the US economy and the hawkishness of the Bank of Japan.
Last week ended on a quieter note, as stronger-than-expected U.S. jobs data on Thursday prompted markets to scale back bets on a Federal Reserve rate cut this year.
However, investors remain unconvinced that the Fed can afford to slow its rate cuts, and its pricing in 100 basis points of easing by year-end, according to CME Group’s (NASDAQ:) FedWatch tool, is consistent with a recession scenario.
That makes markets highly vulnerable to data and events, particularly U.S. 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 AI company Nvidia’s (NASDAQ:) earnings later in the month.
“It’s more of a case of the market getting a little bit ready ahead of the U.S. inflation data,” said Christopher Wong, currency strategist at OCBC Bank in Singapore.
Analysts at Mizuho Bank said investors should pay attention to other jobs and inflation data due between now and the Fed’s September meeting. “The coin toss probability reflects the delicate balance” ahead of this week’s inflation data, the analysts said.
The dollar was at 147.15 yen, up 0.4%, while the euro was steady at $1.0920 and flat at 103.18.
The euro rose a week ago to $1.1009 for the first time since January 2.
The New Zealand dollar edged up slightly to $0.6584 on Monday, while the New Zealand dollar remained below a three-week high of $0.6035 hit last week. It last stood at $0.6015.
The Reserve Bank of New Zealand will review policy on Wednesday and is expected to keep its key interest rate unchanged at 5.50%.
load, unload
Wall Street ended last week higher, closing almost unchanged for the week after a sharp 4.75% drop last Monday, while long-term Treasury yields fell.
Markets, especially Japanese ones, were rocked last week by the end of the once-popular yen carry trade, which involves borrowing yen at a low cost to invest in other currencies and assets that offer higher returns.
The violent sell-off in the USD/JPY from July 3 to August 5, sparked by Japanese intervention, the Bank of Japan raising interest rates, and then the liquidation of yen-funded trades, caused the pair to fall by 20 yen.
Leveraged funds’ net short positions in the Japanese yen shrank to their smallest net short position since February 2023 in the latest week, data from the U.S. Commodity Futures Trading Commission and the London Stock Exchange showed on Friday.
The yen hit its highest since Jan. 2 at 141.675 per dollar on Monday. It remains down 4 percent against the dollar so far this year.
Analysts at JPMorgan revised their forecast for the yen to 144 per dollar by the second quarter of next year, saying that meant the yen would consolidate in the coming months and they saw reason to be optimistic about the dollar’s medium-term prospects.
“Trading has erased gains made so far this year, and we estimate that 65-75% of positions have been liquidated,” they said in a note on Saturday.
Implied volatility in the yen, measured by yen options, has also fallen. Overnight volatility rose to 31% on August 6, but has now fallen to around 5%.