- The Japanese yen has declined to around 146 yen against the US dollar, retreating from its seven-month high of 141.68 as the unwinding of popular carry trades slowed while investors continued to assess the divergent monetary policies between Japan and the United States.
- According to reliable trading platforms, the yen had risen to 141.69 yen against the US dollar earlier this week amid growing expectations that the Bank of Japan will raise interest rates further in the coming months.
- Meanwhile, the growing concerns about a recession in the United States have pushed markets to price in larger interest rate cuts by the Federal Reserve.
Last week, the Bank of Japan raised its interest rate to 0.25% and indicated its willingness to raise rates further if the economy remains strong. Concurrently, Financial markets are betting on two more rate hikes this fiscal year ending in March 2025, with the next hike expected in December. The central bank also announced a plan to halve its monthly bond purchases over the next two years.
Elsewhere, data showed that Japanese authorities spent 5.53 trillion yen to support the currency through intervention in July.
According to Forex trading, the Japanese currency has strengthened in recent weeks thanks to government intervention and a decline in carry trades. The question is: Can the yen maintain its momentum amid a global market rout?
Global financial markets fell on Monday, from Asian stocks to US stocks. While there are a number of reasons to justify the sell-off, one of the main drivers was Japan. Last month, the Bank of Japan raised interest rates and signaled another hike next month. Also, Central bank officials have revealed their intention to reduce their bond purchases. This contrasts with the Federal Reserve, which signaled a quarter-point cut in US interest rates in September, although the futures market expects a 50-basis point cut.
Obviously, the key factor in all this is carry trades. This is a technical strategy used by institutional traders and sophisticated individual traders who borrow in a low-yielding currency (the Japanese yen) and invest the proceeds in a high-yielding currency (the US dollar). As investors leverage their positions, they are unloading potentially profitable positions to limit losses in other assets.
This is what may be happening to explain what is happening in the global markets. Commenting on the performance of the forex market, Kit Juckes, chief currency strategist at Societe Generale, said in a research note published on Monday that the world is experiencing the biggest "carry trade" event in history. He added, "You can't unwind the biggest carry trade the world has ever seen without breaking a few eggs. That's the impression the markets are giving us this morning."
Another element that has gone largely unnoticed is that August is typically a light trading month. In addition, a report had noted. “The first was the U.S. jobs report for July. While the US economy added a total of 114,000 new jobs last month, the unemployment rate rose to 4.3%, the highest level since October 2021. This is important because it triggers the Sahm rule, a recession indicator. If the three-month moving average rises above 0.5%, it indicates that the country is in a recession. This has been true in all but one recession since 1957. Finally, Warren Buffett and his Berkshire Hathaway company sold half of their shares in Apple. Although this was marketed as a trade for tax purposes, investors see it as something more.
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USD/JPY Technical Analysis and Expectations Today
Based on the performance on the daily chart attached, the general trend for the USD/JPY price is down and the psychological support at 140.00 will be the next target if the JPY gains again. Conversely, over the same time frame, a move towards the resistance at 150.60 will be important for the bulls to start taking control again. Currently, we prefer to buy USDJPY from every downtrend without risk.
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