“They will not be able to migrate, at least not for the rest of the year. It is uncertain whether they will be able to migrate until next March.”
The interest rate hike in July and the market chaos
On July 31, the Bank of Japan unexpectedly raised interest rates to around 0.25% and simultaneously announced the expected reduction in purchases of Japanese government bonds (quantitative tightening). Significantly, the BoJ governor hinted at further rate hikes and a neutral interest rate of around 1%. The monetary policy decision and forward guidance contributed to the yen rally and the brief crash of the Nikkei 225.
Is the settlement of the yen carry trade complete?
Economists warn that the settlement of the yen carry trade may not be complete yet, exposing the USD/JPY rate and global markets to greater volatility.
On August 8, the Kobeissi Letter, an industry-leading commentary on global capital markets, reported that Deutsche Bank put the size of the yen carry trade at $20 trillion.
US inflation and jobs data due this week could signal a further narrowing of the US-Japan interest rate differential and potentially trigger a further unwinding of a yen carry trade.
Matheus Dibo, Managing Director of Investment Strategy at Goldman Sachs Private Wealth Management, commented on market conditions:
“Volatility could remain elevated for quite some time. We have some important data points this week. We talked about the retail sales CPI earlier, Jackson Hole next week, so a lot of things that could move the markets in the next few days.”
Cathie Wood, Founder, CEO and CIO of ARK Invest, recently commented on US Treasury yields and the Fed funds rate, stating:
“The metal-to-gold ratio suggests that the 10-year Treasury yield should be around 2% today, not the 3.8% or the 5% it was last October. If the 10-year Treasury yield should be around 2% today, should the Fed funds rate be closer to 1%?”
The Bank of Japan’s summary of statements indicates the intention to reduce the key interest rate to a neutral level of 1% over time.
If interest rate differentials play a role, the outlook for USD/JPY is pessimistic, even if the BoJ leaves interest rates unchanged.
US economic calendar
On Wednesday, August 14, the focus will be on the highly anticipated US CPI report.
Economists expect the annual core inflation rate to fall to 3.2 percent in July from 3.3 percent in June.
Weaker-than-expected figures could fuel speculation about a possible Fed rate cut of 50 basis points in September and multiple cuts of 25 basis points each in November and December.
A weaker CPI report could allow the Fed to focus on the weakening U.S. labor market. A deterioration in labor market conditions could lead to further cuts in the first quarter of 2025.
