Less aggressive comments from Japan's deputy governor
•The market is waiting for the main inflation data in the United States
The Japanese yen fell in the Asian market on Tuesday against a basket of major and minor currencies, continuing its losses for the second day in a row against the US dollar, on the verge of touching its lowest level in two weeks, due to the decline in the chances of additional increases in Japanese interest rates this year, especially after the recent comments of the Deputy Governor of the Bank of Japan.
In order to re-price the existing probabilities around US interest rates, investors are awaiting this week the release of the main US inflation data for July, which will show the extent to which inflationary pressures have weighed on the monetary policymakers at the Federal Reserve. Price outlook
• Japanese yen exchange rate today: The dollar rose against the yen by about 0.2% to (147.52¥), from the opening price of today’s trading at (147.29¥), and recorded its lowest level at (146.91¥).
The Japanese yen ended Monday's trading down 0.4% against the US dollar, its fourth loss in the past five days, and recorded its lowest level in two weeks at 148.22 yen.
Less aggressive comments Bank of Japan Deputy Governor Shinichi Uchida said last week that the central bank will not raise interest rates when financial markets are unstable.
Uchida explained: Given the sharp fluctuations in domestic and external financial markets, it is necessary to maintain the current levels of monetary easing for the time being.
Japanese interest
The above comments have reduced the chances of the Bank of Japan raising interest rates for a third time this year, which is expected to reduce the pressure on carry trade unwinds.
US interest
•According to the CME Group's FedWatch tool, pricing in the probability of a 50 basis point cut in US interest rates at the September meeting is currently stable at 49%, and pricing in the probability of a 25 basis point cut at 51%.
In order to reprice the above contracts, investors are awaiting today, Tuesday, and tomorrow, Wednesday, the release of producer and consumer price data for July, which are the main indicators for measuring inflation in the United States.
Interest Rate Gap Investors have been selling the yen relentlessly for months, given Japan's low interest rates compared to elsewhere, especially the United States, which has led to a buildup of bearish positions in the Japanese currency that some have had to unwind.
The interest rate gap between the US and Japan has created a very profitable trading opportunity, as traders borrow yen at low rates to invest in dollar-denominated assets for a higher return, known as the carry trade.
Following the decisions of the Bank of Japan and the Federal Reserve in late July, the interest rate gap between Japan and the United States narrowed to 525 basis points in favor of US interest rates, the smallest gap since July 2023.
Given the current odds, the gap is expected to narrow to 500 basis points in September, with Japanese interest rates left unchanged.
Japanese Yen Forecasts JPMorgan (NYSE:JPM) analysts revised their forecast for the yen to 144 per dollar by the second quarter of next year, saying this means the yen will consolidate in the coming months and they see reason to be optimistic about the dollar's medium-term prospects.
“Trading has erased gains made so far this year; we estimate that 65-75% of positions have been liquidated,” they said in a note on Saturday.
• Implied volatility on the yen, denominated in yen options, has also fallen. Volatility rose to 31% overnight on August 6 but has now fallen to around 5%.
