The yen jumped to a seven-month high against the dollar on Monday as traders unwound carry trades and bet on faster Bank of Japan tightening. Friday's U.S. inflation data is the main scheduled event of the week, and will help shape the Federal Reserve's rate decision later in September.
The dollar slid to as low as 154.05 yen on Monday, its lowest level since February. It later settled 1% lower on the day at 154.64 yen. That move pushed the dollar past the lows struck in August, when Washington and Tokyo jointly intervened to prop up the yen after it hit 40-year lows.
Much of the yen strength from that intervention unwound quickly at the time. But new tailwinds — capital repatriation, unwinding carry trades and U.S. political pressure — are now giving short speculators reason to reconsider their long-term positioning. The dollar had traded above 160 yen as recently as last Tuesday, underscoring how sharp the reversal has been.
Carry trades face pressure
Lee Hardman, senior currency analyst at MUFG, said the break past the 155 level reinforced traders' bullish view on the yen, since that level had marked the currency's bottom during earlier bouts of intervention this year. Breaking through it, he said, is a bullish signal that could open the door to further yen gains.
Eric Robertsen, global head of research and chief strategist at Standard Chartered, said carry trades have been among the strongest macro performers so far this year despite a global surge in borrowing costs. According to Standard Chartered, the recent burst of yen strength is a "potential threat to carry outperformance", and persistent JPY strength could signal a broader shift in asset allocation.
Inflation data looms for the Fed
The dollar's slide against the yen also weighed on the currency more broadly. The euro rose 0.1% to $1.1624, while the pound gained slightly to $1.3536. Traders are now pricing roughly a 57% chance the Federal Reserve will hike rates this month, following Friday's forecast-beating nonfarm payrolls report.
That leaves this week's inflation print as the key event for the dollar's direction. Elias Haddad, global head of markets strategy at BBH, said a hot CPI reading would all but seal a September hike and support a firmer dollar, while a cooler number would strengthen the case for a hold and leave the currency vulnerable to a dovish repricing. He added that even a confirmed September hike is unlikely to push the dollar to new cyclical highs, since tightening by other major central banks limits the scope for policy divergence.
The European Central Bank also meets Thursday, when it is widely expected to raise euro zone rates.
Source: Investing.com
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