Japan's inflation and wage growth have recently come in above expectations, bolstering the speculation about a possible rate hike and reduced bond buying from the Bank of Japan.
Key points Japan's inflation and wage growth have recently come in above expectations, bolstering the speculation about a possible rate hike and reduced bond buying from the Bank of Japan. We believe the BOJ will adopt a gradual and cautious approach, balancing the risk of economic slowdown and market stability. Yen strength may have run its course, and Fed’s stance will matter more for the yen than the BOJ itself.
moving below 150, is also unlikely unless there is a significant rise in US recession risks or a sharp dovish turn from the Fed. Meanwhile, if the BOJ did not meet the market’s high hawkish bar, yen slide could make a return. could rise back above 155, and yen-funded carry trades could be back in vogue if BOJ signals caution. Latam FX still remains attractive for carry given that many central banks have halted their easing cycles. In Asia, the Indian rupee also offers an attractive carry with political jitters left behind. Within the G10 FX space, positioning for yen weakness may be considered against currencies like NZD where RBNZ rate cuts have been largely priced in.
Positioning: Real money managers and leverage funds have cut back on their net short positions in the Japanese yen recently. The latest data showed that the non-commercial net-short positioning in JPY has been cut by 42% to -107k in the week to July 23 from a record short in the week of July 2. Yet, there are few signs such positions will reverse anytime soon unless there’s any drastic changes for the BOJ’s policy towards tightening. Seasonality: July is a seasonally strong month for the yen, followed by several months of weakness for August through October based on data over the last five, ten or fifteen years.
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