“They won’t be able to hike again, at least for the rest of the year. It’s a toss-up whether they can do one hike by next March.”

The July Rate Hike and Market Mayhem

On July 31, the Bank of Japan unexpectedly raised interest rates to around 0.25% while announcing the anticipated cut to Japanese Government Bond (JGB) purchases (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 Nikkei 225’s brief collapse.

Is the Yen Carry Trade Unwind Over?

Economists have warned that the Yen carry trade unwind may not be over, exposing the USD/JPY and the global markets to more volatility.

On August 8, the Kobeissi Letter, an industry-leading commentary on global capital markets, stated that Deutsche Bank put the Yen carry trade at $20 trillion.

With US inflation and labor market data due this week, the data could signal a further narrowing of the interest rate differential between the US and Japan, possibly triggering another Yen carry trade unwind.

Goldman Sachs Private Wealth Management Investment Strategy Managing Director Matheus Dibo commented on market conditions, stating,

“Volatility could remain elevated for quite a while. We have some key data points this week. We were talking about earlier, retail sales CPI, Jackson Hole next week, so a lot of things that could move markets over the next few days.”

ARK Invest Founder, CEO, and CIO Cathie Wood recently commented on Treasury yields and the Fed Funds Rate, stating,

“The metal-to-gold ratio suggests that the 10-year Treasury bond yield should be around 2% today, not where it is at 3.8% or last October’s 5%. If the 10-year Treasury should yield ~2% today, should the Fed funds rate be closer to 1%?”

The Bank of Japan’s Summary of Opinions revealed an intention to return the policy interest rate to a neutral rate of 1% over time.

If interest rate differentials matter, the outlook is bearish for the USD/JPY, even if the BoJ keeps interest rates on hold.

US Economic Calendar

On Wednesday, August 14, the heavily anticipated US CPI Report will be in focus.

Economists expect the core annual inflation rate to drop from 3.3% year-on-year in June to 3.2% in July.

Softer-than-expected numbers could fuel speculation about a possible 50 basis point September Fed rate cut and multiple 25 basis point cuts in November and December.

A softer CPI Report could allow the Fed to focus on the waning US labor market. Deteriorating labor market conditions could lead to further cuts in Q1 2025.