At the Bank of Japan's monetary policy meeting on July 31, the central bank raised interest rates by 0.15% and outlined a roadmap for reducing bond purchases. This move marked a clearer stance on future monetary policy normalization, triggering a rapid rise in the yen. This led to a large-scale unwinding of carry trades and caused a minor financial market crash globally. The USD/JPY pair began its upward movement around the 103 level in early 2021, with its explosive phase starting in the first quarter of 2022 after the Federal Reserve began its rate hike cycle, continuing from 115 to 162 by early July this year. If we consider the move from 103, the yen has appreciated by 59 yen, with a potential correction target of around 133, representing a 50% retracement. If calculated from 115, the 50% retracement target would be around 138. The Bank of Japan's latest report indicates that inflation continues to remain above target levels, with structural changes in the labor market and rising wages being the primary factors driving inflation higher. Bank of Japan Governor Kazuo Ueda has testified in Parliament that as long as economic and inflation developments align with the central bank's expectations, further rate hikes are on the table. The reversal of monetary policy directions between the U.S. and Japan will likely support a yen recovery. Recently, the USD/JPY pair rebounded from around 142, but it struggled to surpass the 20-day moving average at 149.20. If it confirms a break below recent lows, it is likely to test the 138 level.

At the recently concluded global central bank symposium, Federal Reserve Chairman Jerome Powell clearly stated that the time for rate cuts has arrived, with a September rate cut now almost certain. The only uncertainty is the extent of the reduction. Currently, the market sees less than a 30% chance of a 0.5% rate cut, which I agree with. The fact that the U.S. economy is slowing down is indisputable, especially given the recent significant revision by the Department of Labor, which lowered the number of new jobs added in the 12 months leading up to March by 818,000, raising further concerns about the economic outlook. As a result, there are many who believe that cumulative rate cuts in the U.S. could reach 1% by the end of the year. However, whether the U.S. will experience a recession remains to be seen. Recent retail sales data has been positive, and second-quarter economic growth reached 2.8%. Unless there is a significant downward revision in the future, the U.S. economy is still performing better than other major economies. It can be expected that, aside from Japan, the monetary policies of developed countries will generally trend towards easing, and the pace of U.S. rate cuts may not be faster than in other countries. The U.S. Dollar Index at the 99/100 level represents the bottom of its range in recent years, and it is currently not advisable to be overly pessimistic.

Patrick Law

Chief Operating Officer of Hantec Group