The yen’s stunning recovery is upending global markets, sending assets from Japanese stocks to gold and bitcoin tumbling as investors reassess their leveraged bets.
On Thursday, the yen rose to its highest level in more than two months against the dollar, reflecting growing bets that the U.S.-Japan interest rate differential could narrow. During the U.S. trading session, the yen's gains were somewhat restrained, perhaps as bulls began to take profits and the dollar was supported after a stronger-than-expected U.S. economic growth report.
A stronger yen hurt Japanese exporters and pushed the Nikkei 225 into a technical correction. The stronger yen also hammered currencies such as the Australian dollar, while gold and bitcoin also fell as carry trades fell out of favor and traders appeared to be selling previously popular short yen bets.
Kyle Rodda, senior market analyst at Capital.com, said:
“This is effectively a deleveraging event driven by short covering in the yen, and it’s forcing a broad liquidation in the market.”
The yen’s recent strength has become an additional source of volatility for global assets already shaken by fading enthusiasm for the artificial intelligence boom that has driven Wall Street this year. The yen has risen nearly 5% against the dollar since hitting a multi-year low earlier this month, though that momentum will be tested next week with the release of new U.S. data and meetings of the Bank of Japan and the Federal Reserve.
Behind the yen's rebound is a huge withdrawal from global carry trades, which use low-yielding currencies like the yen to fund investments in higher-yielding currencies like the Mexican peso or the Australian and New Zealand dollars. Growing expectations that the Federal Reserve could ease policy as early as September are also a key driver of the yen's rebound.
Valentin Marinov, head of G-10 currency strategy at Credit Agricole, said that while the yen’s recent gains reflect the unwinding of that carry trade, second-quarter U.S. GDP data on Thursday showing the U.S. economy growing faster than expected “could enhance the appeal of the high-yielding, safe-haven dollar and help it outperform overall.”
Traders are also focusing on the Bank of Japan's rate-setting meeting next Wednesday, with swap markets pricing in about a 70 percent chance of a rate hike at the meeting, up from 44 percent earlier this week.
“Short covering in the yen is undoubtedly exacerbating global risk aversion,” ING strategists Chris Turner and others wrote in a note Thursday. “There is certainly more unwinding to come, and data or events in the coming days could bring further downside risk to USD/JPY.”
Calvin Yeoh, managing partner of Blue Edge Advisors’ Merlion Fund, said:
"Although summer temperatures are high, liquidity is low. If the yen continues to soar, it will further lead to cross-asset liquidation, which will increase volatility and may trigger risk control alarms for some funds and force liquidation."
Article forwarded from: Jinshi Data