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Yen decline halted by restrictive BoJ
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Bets on Fed rate cuts remain cautious, traders await next week’s data
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Tech stocks pull Wall Street down again
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Gold recovers but remains far from its record levels
Yen remains in the spotlight
The yen was back in the spotlight yesterday, with the dollar/yen rate continuing to rally by as much as 2.5% after Bank of Japan Deputy Governor Shinichi Uchida downplayed the possibility of another rate hike any time soon.
However, the dollar/yen rally came to a halt today as the summary of comments on the BoJ’s latest decision showed that some policymakers called for further rate hikes, with one member even suggesting that rates would eventually have to be raised to at least 1%.
The recovery in the dollar/yen was halted today as the summary of comments on the BoJ’s latest decision showed that some policymakers called for a further increase in interest rates.
This revealed a different opinion from Uchida’s and encouraged market participants to increase their rate hike bets. From 74%, the probability of another 10 basis point hike by year-end rose to almost 80%.
Too moderate bets on Fed interest rate cuts
The yen has seen massive price movements recently, driven by a cocktail of developments including the unwinding of carry trades, the BoJ’s larger-than-expected rate hike and fears of a recession in the US, which prompted market participants to increase their bets on a Fed rate cut.
They now expect 110 basis points of cuts by year-end, according to Fed funds futures. They were at 125 on Monday, but the improvement in the ISM non-manufacturing PMI and the encouraging Atlanta Fed GDPNow model for the third quarter prompted them to scale back some of their bets.
The next test of the Fed’s rate-cut bets could be next week’s US CPI and retail sales data for July. However, even if the data points to a further slowdown in inflation, the dollar is unlikely to see a massive sell-off as expectations of a rate cut suggest an already too-dovish positioning. So if traders get more signs that the US economy is not on the verge of recession, the greenback could even recover somewhat.
The next test of Fed rate cut bets could be US consumer price index and retail sales data for July next week.
Wall Street in the red, gold recovers slightly
Wall Street ended another session in the red, with the Nasdaq losing about 1% as shares of technology companies slipped late in the session. The indexes began the day higher but lost momentum as the afternoon wore on.
Perhaps the crowded yen short trade was not only to profit from the higher-yielding dollar, but also to convert those dollars into equities. So for Wall Street to get going again, the dollar/yen ratio may need to continue to recover. That could happen if market participants become less concerned about the state of the U.S. economy, even if that means fewer basis points of expected rate cuts.
Perhaps the crowded short yen trade was aimed not only at profiting from the higher-yielding dollar, but also at converting those dollars into stocks
The price of gold is slightly higher today, but still well below its record high. The fact that the precious metal failed to gain during this turbulent period suggests that it was not a safe investment for investors. Even after the weak US labor market data, gold was unable to benefit from the falling dollar and falling US Treasury yields.
Perhaps it’s China’s fault again, as data yesterday showed that the People’s Bank of China stopped buying gold in July for the third month in a row. Moreover, the fact that Shanghai gold prices are falling faster than international prices suggests that private demand in the world’s second-largest economy is also weakening.
