TMGM Group reported that former ECB President Trichet believes the correction of the yen's exchange rate is healthy and that now is not a time for panic. The data does not support an emergency rate cut by the Federal Reserve. Japan's hawkish turn in monetary policy, geopolitical tensions in the Middle East, and disappointing U.S. employment data rocked global markets last Friday and Monday. These three factors played a role, triggering a correction in the USD/JPY exchange rate—a correction long overdue as everyone knows that the yen's rate was at an unreasonable level, with carry trades being very active for a long time.
A correction is typically defined as a drop of 10% or more in the value of an asset or index, bringing it closer to long-term trends. Carry trade involves borrowing in a low-interest-rate currency and reinvesting in higher-yielding assets elsewhere to profit from the difference. In recent years, investors have flocked to yen carry trades, attracted by Japan's low volatility and ultra-loose monetary policy.
The rapid appreciation of the yen began last Wednesday when the Bank of Japan raised its benchmark rate and outlined plans to taper its bond-buying scheme. Last week, the USD/JPY plummeted nearly 5%, continuing to fall on Monday, although it rebounded on Tuesday. Meanwhile, global stock markets tumbled, and safe-haven assets like the Swiss Franc and U.S. Treasuries found support.
Following a July employment report that fell short of expectations, discussions about a U.S. recession erupted. However, some economists and Fed policymakers believe the data do not show severe recession signs. The U.S. Composite Purchasing Managers' Index (PMI) for July remained in expansion territory.
According to the CME Group's FedWatch Tool, the market already believes the Federal Reserve will cut rates at its next meeting in mid-September, with bets on a 50-basis-point cut reaching nearly 75%. Some speculate the Fed might need to make an emergency rate cut. Although the Fed might waver between 25 and 50 basis points, the current data do not support an emergency cut. The Fed is unlikely to incite unwarranted anxiety, as more data over the next few weeks will provide a clearer economic picture. Despite the persistent high inflation in the U.S. and the Eurozone, the ongoing disinflationary trend should be credited to central banks.
Market Analysis:
After an oversold USD/JPY H4 level rebound, the MACD double lines and volume bars are continually shrinking. Unwinding the largest carry trade in history inevitably causes some pain. From some perspectives, this correction can be seen as a healthy adjustment, but extreme caution is necessary.
About TMGM
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