By Ankur Banerjee
SINGAPORE (Reuters) – The yen was volatile on Thursday after falling sharply in the previous session in a volatile week that weighed on breakable sentiment as investors weighed unwinding popular carry trades and wondered what path interest rates the Japanese central bank was likely to take.
The yen last rose 0.4% to 146.02 per dollar, after falling 1.6% on Wednesday after Bank of Japan Deputy Governor Shinichi Uchida downplayed the risk of a near-term rate hike.
The Japanese currency started the week by hitting a seven-month high of 141.675 per dollar, a far cry from the 38-year low reached in early July when tender U.S. jobs data last week sparked recession fears and irked investors.
The Bank of Japan’s surprise interest rate hike last week also prompted investors to pull out of carry trades, in which investors borrow yen at low interest rates to invest in dollar-denominated assets for higher yields, helping to strengthen the yen.
A summary of views expressed at the Bank of Japan’s July meeting showed on Thursday some board members calling for further interest rate hikes, with one saying they should ultimately be raised to at least around 1%.
The conflicting views in the executive summary and Uchida’s comments on whether the BOJ will continue to raise interest rates or pause them amid market volatility underscore the dainty task facing the central bank and are likely to worry investors.
“While the BOJ has remained on hold for now, it is likely to continue to take steps to normalize policy in the coming months,” said Vasu Menon, managing director of investment strategy at OCBC.
“It may be too early to pop the champagne as markets remain vulnerable to the risks of negative news flows and other global uncertainties.”
ANZ Bank chief economist Sharon Zollner and strategist David Croy pointed out that even if the Federal Reserve cuts rates by the amount markets have priced in and the BOJ raises them again, Japanese rates would still be significantly lower than those in the US.
“So the carry trade is unlikely to end anytime soon, but we could see more volatility in the dollar versus the yen as investors trim high-risk positions,” they wrote in a note.
The Swiss franc, another currency used to fund carry trades, was slightly stronger at 0.859 per dollar, after falling more than 1% in the previous session.
DEFENSIVE DOLLAR
The yen’s wild swings pushed the yen, which measures the U.S. currency’s value against six currencies including the yen, to 103.03, approaching a seven-month low of 102.15 hit on Monday.
The euro was steady at $1.09315, while sterling last touched $1.26925, holding close to a one-month low reached on Tuesday.
Investors are expecting the Federal Reserve to cut interest rates by 50 basis points at its next meeting in September as the economy slows, but they are also factoring in a 26.5% chance of a smaller 25 basis point cut, according to CME Group’s (NASDAQ:) FedWatch Tool.
They fully priced in a 50 basis point rate cut on Monday and even began pricing in the possibility of an emergency rate cut before the September meeting, though those chances have since dimmed as markets have stabilized somewhat.
Investors’ attention will now turn to the U.S. consumer price inflation report for July, due next week, as well as comments by Federal Reserve Chairman Jerome Powell at the central bank’s economic policy symposium in Jackson Hole, which will be held Aug. 22-24.
“Investors need to brace themselves for a challenging environment,” OCBC’s Menon said, noting that there are still six weeks until the next Federal Reserve meeting and “there will be a lot of economic data in the meantime that could change the playing field.”
The Australian dollar rose 0.51% to $0.6552, while the New Zealand dollar remained steady at $0.59975. [AUD/]
