The Japanese yen experienced a dip against major currencies on Monday as global markets began to stabilize following a tumultuous week. Investors are now shifting their focus to the upcoming U.S. inflation data, which could provide critical insights into the Federal Reserve's next moves regarding interest rates.
Last week saw significant volatility across global markets, driven by fears of a U.S. recession and uncertainty surrounding the Bank of Japan's monetary policy. The yen, often seen as a safe-haven currency, was at the center of this storm. However, as the dust begins to settle, the currency markets are showing signs of calm.
Brent crude futures reached $80.39 a barrel, while U.S. West Texas Intermediate (WTI) crude climbed 88 cents, or 1.2%, to $77.72. This upward trend follows a more than 3% rise in prices last week, supported by stronger-than-expected U.S. jobs data and easing fears of an imminent recession.
"If global investor risk sentiment continues to improve in the week ahead, it is likely that market expectations for Fed rate cuts will continue to be scaled back," currency analysts at MUFG noted in a research note. The market is currently pricing in the possibility of 100 basis points of rate cuts by the end of the year, according to the CME Group's FedWatch tool.
The yen was trading at 147.55 against the dollar, marking a 0.7% drop. It also fell nearly 0.5% against the Swiss franc, settling at 0.8694. Meanwhile, the euro dipped slightly to $1.0923, and the dollar index remained flat at 103.22. Sterling held steady at $1.2761.
The recent volatility in the yen has been partly attributed to the unwinding of the yen carry trade, a popular investment strategy that involves borrowing yen at low interest rates to invest in higher-yielding currencies and assets. Last week, Japan's intervention in the currency markets, coupled with a rate hike by the Bank of Japan, triggered a sharp sell-off in the dollar-yen pair, causing it to fall by 20 yen.
Leveraged funds' positions on the Japanese yen shrank to their smallest net short stance since February 2023, according to data from the U.S. Commodity Futures Trading Commission and LSEG. The yen reached its strongest level since January 2 at 141.675 per dollar last Monday but has since retreated. Year-to-date, the yen remains down around 4% against the dollar.
J.P. Morgan analysts have revised their forecast for the yen, predicting it will reach 144 per dollar by the second quarter of next year. They believe the yen will consolidate in the coming months. "Carry trades have erased year-to-date gains; we estimate 65-75% of positioning being unwound," they stated in a note.
In the European session, the yen weakened further against the euro and the British pound, falling to 160.93 and 188.20, respectively. If the yen continues its downtrend, it may find support around 170.00 against the euro and 200.00 against the pound.
The yen also dropped against the U.S. dollar and the Swiss franc, reaching 147.32 and 169.88, respectively. Further declines could see the yen testing support near 154.00 against the dollar and 174.00 against the franc.
Looking ahead, market participants will be closely watching U.S. inflation data scheduled for release on Tuesday and Wednesday. This data could significantly impact market expectations for the Federal Reserve's next moves. "It's more a case of market squaring up a little bit ahead of the U.S. inflation data," said Christopher Wong, a currency strategist at OCBC Bank in Singapore.
The market's focus will also be on key reports from Canada and the U.S., including building permits for June, U.S. consumer inflation expectations for July, and the U.S. Federal monthly budget statement for July.
