Riding the wave of a weaker yen, Japanese stocks led the way in Asia on Friday, with the Nikkei stock average soaring more than 3 percent for its best week in four years. The gains followed an overnight rally on Wall Street, buoyed by strong economic data that eased concerns about a looming recession and suggested the U.S. economy may be on track for a soft landing.
Although well-known business publications are suggesting a return to the carry trade, that is not necessarily true. That is how the FX market works. Since 2006, both human and algorithmic traders have been closely monitoring the Yen, reacting in real time to the twists and turns of global risk markets. When stock markets plummet, X/JPY also falls, and when risk assets soar, X/JPY also rises. This behavior has turned the Yen’s movement into a self-fulfilling prophecy, a cycle in which expectations drive reality. In other words, it reflects trade risks that could cause USDJPY to overshoot. That said, some “late-start Johnny” demand for yen-financed circulating currencies is likely to support USDJPY today.
However, the picture has become more complicated since the Bank of Japan took a more dovish stance last week, stabilizing market conditions and especially as the yen has risen above the 150 yen level, raising the possibility that the BOJ may consider further policy normalization.
Indeed, the rules have changed and those in the know understand that what appears to be a market crisis is merely another opportunity, thanks to central banks' uncanny ability to manipulate market sentiment.
While a September rate hike seems unlikely, especially given the recent sell-off in Japanese stocks, my calculations have jumped the chances of a rate hike by the end of 2024 from 0% to 30%. Markets are beginning to price in the possibility that the BOJ may shift policy sooner than expected as the economic situation continues to evolve.
The movement of the yen remains a key storyline in global financial affairs, with attention focused on the Bank of Japan's next move, which could limit upside movement in USDJPY.
I think USD/JPY may have overshot due to risks to demand for X/JPY rather than a calculated move. Unfortunately for the outright bearish attack on the dollar, unexpectedly strong US data may have quelled rumors of a 50bp rate cut in September, so we could wait until the Jackson Hole meeting or the NFP announcement.
