By Laura Matthews
NEW YORK (Reuters) – The yen weakened against the dollar in foreign exchange markets on Monday as investors weighed the likelihood of a deep Fed interest rate cut next month ahead of a series of U.S. economic data after piercing changes last week.
The respite comes after a turbulent week that began with a massive sell-off in currencies and stocks on concerns about the U.S. economy and a hawkish stance by the Bank of Japan.
The past week ended on a more sedate note. Thursday’s better-than-expected U.S. employment data prompted markets to abandon expectations that the Federal Reserve will cut interest rates this year.
“What they really care about is whether the inflation narrative is going to come back with this week (CPI) or whether we’re going to continue with the new narrative that the economy is headed into recession, as exemplified by what’s happening in the nonfarm payroll labor market,” said Joseph Trevisani, senior analyst at FXStreet.com in New York.
Still, investors are pricing in 100 basis points of Fed rate cuts by the end of the year, according to CME Group’s (NASDAQ:) FedWatch tool, and U.S. producer and consumer price data due Tuesday and Wednesday could change market perceptions.
“We’re watching where the Fed’s focus goes. Right now it’s back to the labor market. That could change if there’s something unexpected in inflation, CPI, especially if those go up,” Trevisani said.
The dollar was trading at 147.10 yen, up 0.33%, and was level with the Swiss franc at 0.8661.
The euro gained 0.16% to $1.0933, while it fell to $103.10. Sterling was flat at $1.2763.
A week ago, the euro rose to $1.1009 for the first time since January 2.
CARRY TRADES RESOLVED
Markets, and Japan in particular, were rocked last week by the end of the hugely popular yen carry trade, which involves borrowing yen at a low cost to invest in other currencies and assets offering higher returns.
The piercing sell-off in the dollar-yen pair between July 3 and August 5, triggered by Japanese intervention, a Bank of Japan interest rate hike and the subsequent withdrawal of yen-financed carry trades, caused the pair to fall by 20 yen.
Leveraged funds’ Japanese yen positions narrowed last week to their smallest net low position since February 2023, according to US Commodity Futures Trading Commission and LSEG data released on Friday.
The yen hit its strongest level since Jan. 2, at 141.675 per dollar last Monday. It is still down about 4% against the greenback this year.
“Comments this morning from a former Bank of Japan official summarizing why the BoJ is unlikely to rush into another rate hike weakened the JPY,” said Jane Foley, head of currency strategy at Rabobank in London.
“That said, given the likelihood of higher volatility through the end of the year due to the US election and the likelihood of Fed rate cuts, it is unlikely that the market will return to carry trading.”
