19 august 2024 : SINGORE – On Monday, the U.S. dollar experienced a significant decline, particularly against the yen, as investors anticipated a dovish stance in the forthcoming minutes from the Federal Reserve’s July policy meeting and Chair Jerome Powell’s speech scheduled for Jackson Hole.
The release of the minutes on Wednesday, along with Powell’s address on Friday, is expected to be pivotal in influencing currency fluctuations throughout the week. Additionally, inflation data from Canada and Japan, as well as Purchasing Managers’ Index reports from the U.S., eurozone, and the UK, will also be released.
In relation to the yen, the dollar decreased by over 0.8%, reaching 146.37, pulling back from a two-week peak of 149.40 yen achieved last week. Analysts noted that this significant drop was primarily attributed to a general weakness of the dollar.
Bank of Japan Governor Kazuo Ueda is scheduled to appear before parliament on Friday, where he is anticipated to address the central bank’s decision to raise interest rates last month.
The BOJ’s shift towards a more hawkish stance last month contributed to market volatility in early August, following a substantial unwinding of yen-funded carry trades, which led to a considerable selloff in risk assets and a sharp decline in stock markets, including the Nikkei.
This earlier volatility was exacerbated by a series of disappointing U.S. economic indicators, notably a lackluster jobs report for July, which raised concerns among investors about a potential recession in the world’s largest economy and the Federal Reserve’s slow approach to rate adjustments.
As these concerns have begun to ease, the yen has retraced some of its earlier gains, with Japanese investment data released on Friday indicating that investors are once again favoring a cautious approach regarding the BOJ’s rate increases and the yen’s relative weakness.
Carol Kong, a currency strategist at Commonwealth Bank of Australia, remarked, “The challenge with carry trades is the inherent difficulty in accurately assessing their scale.”
There is uncertainty regarding the extent of the unwinding process and how much further it may continue. However, given the significant declines observed in the dollar/yen exchange rate, I have reservations about the sustainability of this pace moving forward.
In other developments, the euro was last quoted at $1.1039, approaching a seven-month peak of $1.10475 reached last week. The British pound rose to a one-month high of $1.2960 earlier in the session, settling at $1.2957.
In comparison to a basket of currencies, the dollar experienced a decline of 0.24%, standing at 102.21, which is close to a seven-month low of 102.15.
Market participants have fully anticipated a 25-basis-point rate reduction from the Federal Reserve in September, with a 24.5% probability assigned to a 50 basis point cut. Futures indicate expectations of over 90 basis points of easing by the end of the year.
“Market attention will be sharply focused on Powell’s remarks at the end of this week, presenting a significant opportunity for him to either validate or counter the market’s pricing,” stated CBA’s Kong.
“I believe he will at least signal support for a rate cut at the September meeting. If anything, he may seek to maintain flexibility, as additional data will be available before the next meeting.”
The New Zealand dollar appreciated by 0.43% to $0.6078, while the Australian dollar reached a one-month high of $0.6694, buoyed by improved risk sentiment in anticipation of a dovish outcome from the Federal Reserve.
The Australian dollar also benefited from a reduction in expectations for immediate rate cuts in Australia, following comments from Reserve Bank of Australia Governor Michele Bullock, who indicated that it was premature to consider rate cuts.