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Market Turmoil: Yen’s Dramatic Rebound Sets Stage for Volatility

The Japanese yen has made a dramatic comeback, surging 4.7% against the US dollar in July, leaving the currency on track for its best month this year. This sudden shift has sent shockwaves across global markets, setting the stage for further volatility in the coming days.

Causes of the Yen’s Rebound

The yen’s recovery is largely attributed to the possibility of the Bank of Japan (BoJ) raising interest rates on Wednesday, narrowing the gap with the Federal Reserve’s borrowing costs that had driven the currency to a series of multi-decade lows. Additionally, expectations of Fed rate cuts have increased following a decline in US inflation earlier this month.

Unwinding of Carry Trades

The yen’s recovery has also been fueled by the unwinding of popular "carry trades," where investors borrowed in yen to fund the purchase of higher-yielding currencies. As investors cut their losses on misfiring carry trades, they were forced to sell assets in other parts of the market, contributing to a sharp sell-off in global tech stocks.

Impact on Markets

The yen’s surge has had a ripple effect on global markets, with traders predicting further volatility in the coming days. "The FX market is moving everything right now, because yen-funded carry trades have been one of the most popular trades this year — cutting the positions is affecting other risk positions as well," said Athanasios Vamvakidis, global head of foreign exchange at Bank of America.

BoJ Interest Rate Decision

The Bank of Japan is set to make a crucial interest rate decision on Wednesday, with traders evenly split on the prospect of a 0.15 percentage point rate hike to 0.25%. A decision not to raise rates could trigger a rapid reversal for the yen, sending it back on course towards the ¥161 per dollar low at which the Japanese authorities are suspected of having intervened in mid-July.

US Political Influence

Looming over the BoJ’s decision is the influence from the US political scene, including comments by Donald Trump that the US has a "big currency problem" due to the weakness of the yen and yuan. This has led to speculation that the US may explore different options to weaken the dollar if Trump wins the presidential election in November.

Conclusion

The yen’s dramatic rebound has set the stage for further volatility in the coming days, with traders bracing for a potential BoJ interest rate decision and adjusting to a global shift in risk appetite. As investors continue to unwind their positions, it’s crucial to stay informed and adapt to the rapidly changing market landscape.

FAQs

Q: What is the main cause of the yen’s rebound?
A: The possibility of the Bank of Japan raising interest rates on Wednesday, narrowing the gap with the Federal Reserve’s borrowing costs, and expectations of Fed rate cuts following a decline in US inflation.

Q: What is a carry trade?
A: A carry trade is a popular trading strategy where investors borrow in a low-interest currency, such as the yen, to fund the purchase of a higher-yielding currency.

Q: How has the yen’s recovery affected global markets?
A: The yen’s surge has contributed to a sharp sell-off in global tech stocks and has sent shockwaves across global markets, setting the stage for further volatility in the coming days.

Q: What is the Bank of Japan’s interest rate decision expected to be?
A: Traders are evenly split on the prospect of a 0.15 percentage point rate hike to 0.25%. A decision not to raise rates could trigger a rapid reversal for the yen.

Author: www.ft.com

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