Dollar steady, yen wobbles as traders consider rate cut bets, carry

By Ankur Banerjee

SINGAPORE (Reuters) – The dollar was steady on Wednesday, dragging the yen away from a seven-month peak as currency markets regained a semblance of calm in a week that began with a massive shakeout in assets driven by recession fears and unwinding of popular carry trades.

The yen was 1% lower at 146.43 per dollar in early trading, inching away from the seven month high of 141.675 it touched on Monday, it is still up 3% in August and well above the 38-year lows of 161.96 it was languishing in just at the start of July.

The yen’s fortunes have shifted since then as bouts of well-timed interventions from Tokyo in early July and a hawkish shift from the Bank of Japan last week led investors to bail out of once-popular carry trades, in which traders borrow the yen at low rates to invest in dollar-priced assets for higher returns.

The market volatility was exacerbated by a softer-than-expected U.S. job report on Friday, and disappointing earnings from major tech firms, sparking a global sell-off in riskier assets as investors feared the U.S. economy was heading for a recession.

“The yen undervaluation was a bit overstretched,” said Aninda Mitra, Head of Asia Macro and Investment Strategy, BNY Advisors Investment Institute. “There was an adjustment that was waiting to happen.”

The swing in yen positioning seen over the last one month was among the largest on record, according to strategists at JP Morgan, with their models suggesting 65% of yen shorts have now been covered as of Aug. 6.

“While there are still JPY shorts out there, positioning-induced volatility in may begin to edge down from here.”

On Wednesday, the euro was little changed at $1.092675, while sterling last fetched $1.26985 in Asian hours, not far from the five-week low it hit in the previous session.

The , which measures the greenback against six rivals, eased to 102.94 but is up from the seven month low of 102.15 it touched on Monday.

Traders have also adjusted their expectations from the Federal Reserve this year following the soft jobs report last week, with nearly 105 basis points of easing anticipated by year-end.

Markets are now pricing in a 70% chance of the Fed cutting rates by 50 bps in September, CME FedWatch tool showed, compared with 85% chance a day earlier, with major brokerages also anticipating a large rate cut in the next meeting.

Some analysts though expect the Fed to take a measured approach.

“My sense is that the Fed is doing what it does, it wants some reaffirmation of the trend from several data points … before drawing a conclusion,” said BNY’s Mitra.

“Whereas the market looked at one NFP print … and jumped to the conclusion that a rate cut was needed.”

A Reuters poll of foreign exchange strategists expects the dollar to claw back some of its recent losses over the next three months on expectations markets have again gone too far in pricing in too many interest rate cuts this year.

In other currencies, the Australian dollar was 0.24% higher at $0.6534, a day after the central bank ruled out the possibility of an interest rate cut this year, saying core inflation is expected to come down only slowly.

The has struggled in recent days, sinking to eight month lows on Monday in the wake of the global markets meltdown.

The New Zealand dollar was up 0.74% at $0.5998 following strong jobs data.