Yen Strengthens on Carry Trade Liquidation

26 Jul 2024 , 09:00 AM

On Friday, the yen was poised for its strongest week in over three months as traders reversed long-held bets against the fragile currency ahead of critical U.S. inflation data that might reinforce rate drop predictions.

The yen has dominated currency markets this month, rising to a near three-month high of 151.945 per dollar on Thursday after beginning the month at a 38-year low of 161.96 per dollar.

The big rise follows Tokyo’s suspected interventions in early July, which caught markets off guard and resulted in the unwinding of profitable carry trades, in which traders borrowed the yen at low interest rates to invest in dollar-priced assets for better returns.

On Friday, the yen was last seen at 153.625, up 2.3% for the week, its highest weekly gain since late April-early May, as a worldwide stock market downturn drove investors to safe assets such as the yen.

On Friday, investors will focus on the United States’ personal consumption expenditure data, which is the Federal Reserve’s preferred indicator of inflation. The PCE data is predicted to come in at 0.1% each month.

The Fed meets next week and is anticipated to leave rates unchanged, but markets are completely pricing in a rate decrease in September. Traders expect 66 basis points of easing this year.

The Bank of Japan, on the other hand, may boost rates next week, with markets putting in a 64% chance of a 10-basis-point hike.

Core inflation in Japan’s capital increased for the third consecutive month in July, fuelling expectations of a near-term interest rate hike.

Analysts believe that the yen’s increase may allow the central bank to take its time.

The dollar index, which compares the US currency to six rivals, was barely changed at 104.35. The euro was slightly firmer at $1.0853, but is down 0.35% this week, the worst weekly fall since early June.

The dollar regained its footing after data on Thursday revealed that the world’s largest economy expanded faster than predicted and inflation slowed in the second quarter.

The Australian dollar was up 0.15% at $0.65475, only a little higher than the near three-month low reached on Thursday. The deteriorating risk sentiment this week has had a significant impact on the Australian and New Zealand dollars.

The Australian dollar is down 2% this week, marking its worst weekly performance since November 2023. The kiwi was last traded at $0.5888, on course for 2% weekly decline.

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