Carry trades, popular in the FX space. involve borrowing in a low-interest-rate environment to invest in a higher-interest-rate environment. For the USD/JPY, carry trades involve being long on the US dollar or short on the Yen. USD/JPY movements are exaggerated as investors use leverage to boost returns.

The USD/JPY fell from a July 31 high of 153.889 to an August 5 low of 141.684 due to carry trade unwinding.

Equity and crypto market moves following the BoJ policy decision also reflected the effects of unwinding carry trades.

Is the Yen carry trade unwind close to an end?

Multiple 2024 Fed rate cuts and a US economic recession could narrow interest rate differentials further, weakening the USD/JPY and delivering more pain to the markets.

Brookings Institution Senior Fellow Robin Brooks commented on the Yen carry trade, stating,

“Price action since Friday offers a good lens on where the Yen carry trade is concentrated. EM currencies that have been most hit are the Mexican Peso and Colombian Peso, both of which have been known to harbor lots of carry trades. South Africa and Turkey are also getting hit…”

US Economic Calendar

Later in the Tuesday session, the RCM/TIPP Economic Optimism Index needs consideration.

Economists expect the Index to rise from 44.2 in July to 45.0 in August, potentially influencing the USD/JPY pairing amid US recession fears.

The Index reflects consumer views on the US economy, personal finances, inflation, and the labor market. A higher-than-expected Index would suggest increasing consumer spending, easing concerns about the economic outlook as it contributes over 60% to GDP.

Moreover, higher spending trends could fuel demand-driven inflation, reducing the need for multiple 2024 Fed rate cuts. A less dovish Fed rate path may support a USD/JPY move toward 150.

Expert Views

Bloomberg Chief Markets Editor David Ingles said,

“Govt bonds as a group up 8 straight days, longest streak in 4 years. Growth outlook souring, rate cuts starting to come out of the kitchen. Swaps signal 3 Fed cuts now fully priced this year. Eerily enough, last time we had an 8-day streak was when pandemic lockdowns pummeled the global economy.”

Short-term Forecast: Bearish

USD/JPY trends will hinge on household spending and wage growth numbers from Japan. Upbeat numbers could raise investor bets on a Q4 2024 BoJ rate hike and a USD/JPY fall below 140.

Investors should remain alert. Monitor real-time data, central bank monetary policy decisions, and expert commentary to adjust your trading strategies accordingly. Stay updated with our latest news and analysis to manage USD/JPY volatility.

USD/JPY Price Action

Daily Chart

The USD/JPY sat well below the 50-day and 200-day EMAs, confirming the bearish price trends.

A USD/JPY return to 145 would support a move toward 150. Furthermore, a breakout from 150 could bring the 151.685 resistance level into view.

Japan’s household spending and the RCM/TIPP Economic Optimism Index require consideration on Tuesday.

Conversely, a drop below the 143.495 support level could signal a fall to the 141.032 support level. A break below the 141.032 support could bring sub-140 into play.

The 14-day RSI at 13.96 shows the USD/JPY in oversold territory. Buying pressure may increase at the 143.495 support level.