FX Daily: Trive Bullish on USD/JPY but Cautious Ahead of the US Jobless Report Today

As fears of a US recession gradually diminish, this could lead markets to scale back their expectations for Fed rate cuts, boosting the USD and improving risk sentiment. In contrast, the BoJ is reducing its hawkish stance on further rate hikes, lowering the risk of a deeper unwinding of yen carry trades in the near term. However, be cautious of potential triggers from today's US weekly jobless claims report. A weak NFP report released last week could further stoke recession fears if today's report also shows weakness.

USD: Not so easy

While the USD has recouped some of its recent losses thanks to better-than-expected US data this week, market fears about a US recession and an aggressive Fed easing cycle persist. These concerns have already significantly reduced the USD's relative rate advantage compared to other G10 currencies and could continue to weigh on the currency in the coming months. However, markets appear to have adopted an excessively dovish outlook on the Fed. A correction of this view could see the USD regain ground more broadly.

Moreover, Fedspeak reiterates that a US recession is not imminent and that recent US labor market data should be viewed within the context of a gradual softening of the economic outlook. If US recession fears subside further, markets may scale back their Fed rate cut expectations, boosting the USD and improving risk sentiment.

Today's focus will be on the US Initial Jobless Claims. The July labor report indicated that the unemployment rate rose to 4.3% from 4.1%, heightening recession fears. If the jobless report continues to show further weakness, the market may expect another 50bps cut in September, and recession risks could resurface.

Currency Strength Between USD & JPY

JPY: BoJ sounds the ‘all clear’

The BoJ dials back hawkish rhetoric for further rate hike and reduce the risk of an even deeper unwind of yen carry trades in the near-term. The main trigger for the sharp yen selloff overnight were reassuring comments from BoJ Deputy Governor Uchida who stated that “I believe that the bank needs to maintain monetary easing with the current policy interest rate for the time being, with developments in financial and capital markets at home and abroad being extremely volatile”.

He went on to add that “in contrast to the process of policy interest rate hikes in Europe and the United States, Japan’s economy is not in a situation where the bank may fall behind the curve if it does not raise the policy rate at a certain pace. Therefore the bank will not raise its policy interest rate when financial and capital markets are unstable”.

As a result, the Japanese rate market has moved to pare back expectations for further BoJ rate hikes this year, and only 6bps of hikes priced in by the December policy meeting. If financial markets stabilize in the coming months another rate hike can’t be ruled out if Japan’s economy and prices evolve in line with the BoJ’s outlook although it is more likely delayed until next year.

USD/JPY 4H

BoJ Interest Rate Probability

USD/JPY Current Retail Sentiment

Fed Interest Rate Probability

Disclaimer

This material is provided for informational purposes only and does not constitute financial, investment, or other advice. The opinions expressed in this material are those of the author and do not necessarily reflect the views of Trive International. No opinion contained in this material constitutes a recommendation by Trive International or its author regarding any particular investment, transaction, or investment strategy. This material should not be relied upon in making any investment decision.

The information provided does not consider the individual investment objectives, financial situation, or needs of any specific investor. Investors should seek independent financial advice tailored to their individual circumstances before making any investment decisions. Trive International shall not be liable for any loss, damage, or injury arising directly or indirectly from the use of this information or from any action or decision taken as a result of using this material.

Trive International may or may not have a financial interest in the companies or securities mentioned. The value of investments may fluctuate, and investors may not get back the amount they originally invested. Past performance is not indicative of future results.

For more information about Trive International, please visit http://trive.com/int

Additional Information

Investing involves risk, including the potential loss of principal. Diversification and asset allocation strategies do not ensure a profit or guarantee against loss. The content in this material is subject to change without notice and may become outdated or inaccurate over time. Trive International does not undertake any obligation to update the information in this material.

By accessing this material, you acknowledge and agree to the terms of this disclaimer. If you do not agree with these terms, please refrain from using this information.