FX UPDATE 12/08/2024

 The Japanese Yen continued its gradual decline against the Dollar on Monday after a week of volatile trading, as investors assessed the likelihood of a significant Fed rate cut next month, with a series of US economic reports on the horizon. This pause comes after a turbulent week marked by a major sell-off in currencies and stock markets, spurred by concerns about the US economy and the Bank of Japan's aggressive stance. Last week concluded on a more stable note, as stronger-than-expected US jobs data on Thursday prompted markets to reduce expectations for Federal Reserve interest rate cuts this year. “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,” said MUFG currency analysts. Despite this, investors are still factoring in 100 basis points of Fed rate cuts by the end of the year, according to the CME Group's FedWatch tool. Upcoming US producer and consumer price data, set to be released on Tuesday and Wednesday, could further influence market expectations. “It's more a case of market squaring up a little bit ahead of the US inflation data,” according to Christopher Wong, currency strategist at OCBC Bank in Singapore.

At the time of writing the greenback was up 0.5% at 147.315 Yen, whilst the Euro was trading at $1.091850 and the Dollar index, measuring the currency against six major peers, held flat at 103.21. Elsewhere, Sterling fell 0.1% to $1.2764. Last week the single currency hit a high of $1.1009 for the first time since the beginning of the year, Reuters reports.

Last week, markets, especially in Japan, were shaken by the unwinding of the widely favoured Yen carry trade, a strategy that involves borrowing Yen at low interest rates to invest in higher-yielding currencies and assets. The sharp sell-off in the Dollar-Yen pair between 3rd July and 5th August, triggered by Japan's intervention, a Bank of Japan rate hike, and the subsequent unwinding of Yen-funded carry trades, led to a 20-Yen drop. The Japanese currency hit its strongest level since 2nd January at 141.675 per Dollar last Monday, yet it remains down around 4% against the greenback so far in 2024. 

JP Morgan analysts adjusted their forecast for the Yen to 144 per Dollar by the second quarter of 2025, suggesting that the Yen would likely consolidate in the coming months. “Carry trades have erased year-to-date gains; we estimate 65-75% of positioning being unwound,” they said in a note over the weekend.

Elsewhere, in India, the Reserve Bank of India was likely selling Dollars on Monday in a bid to support the Rupee, which was just off its all-time low at the time of writing, according to four traders who informed Reuters news agency. Indeed, the Rupee was at 83.9650 to the Dollar, close to the record low of 83.9725 hit on Wednesday last week. A trader at a private sector bank said that the central bank is likely “persistently” on offer (on Dollar/Rupee) on the inter-bank order matching system.

In early Monday trade, the Rand was stronger in South Africa. Indeed, at the time of writing, it stood at 18.25 against the greenback, a 0.4% increase compared to the prior close.