Soft dollar keeps yen aloft as Fed hints rate cuts on the way

British Pound

Reuters: The pound held steady versus the dollar on Wednesday but headed for its biggest one-day drop against the yen in nearly three months after the Bank of Japan raised interest rates in an unexpectedly hawkish move. Investors were mainly focused on the Bank of England's interest rate decision on Thursday, with greater uncertainty than usual as policymakers have not spoken publicly for more than two months due to rules in the run-up to July 4's election. The pound was trading steadily, at $1.2832 and was on course for a 1.5% monthly gain against the dollar.

Sterling options volatility, meanwhile, exploded to its highest in almost a year, reflecting the degree of trader nervousness ahead of the decision. Bank of America strategists called the decision "super close", but said they believed the central bank would cut rates by 25 basis points. "The question is: has the data since June changed the minds of the dovish members, who were close to cutting in June, enough. The lack of BoE-speak makes it difficult to gauge, but we suspect, for the dovish members, it doesn't," they said.

Implied overnight options volatility - a measure of demand for protection from big near-term price swings - hit 12.13%, the most since August last year and marking its biggest one-day rise since last June, according to LSEG data. Market pricing around the outcome of the BoE meeting has swung wildly in the past few days, and by Wednesday morning was showing around a 63% chance of a cut. The pound, however, dropped as much as 1.8% against the yen after the BOJ raised interest rates by more than expected and left the door open to more rate hikes, which sent the yen scorching higher against a range of currencies.

Later in the day, the Federal Reserve is expected to hold U.S. borrowing costs steady, but open the door to rate cuts as soon as September after recent data showed U.S. price pressures were easing broadly. The euro edged slightly higher against the pound on Wednesday but looked set for a fifth consecutive month of declines. Euro/sterling was last up 0.17% at 84.385 pence.

US Dollar

Reuters: The U.S. dollar on the defensive on Thursday after the Federal Reserve opened the door for an interest rate cut in September, helping keep the yen pinned near its highest since March in the wake of a hawkish pivot from the Bank of Japan. An action-packed Wednesday started with the BOJ raising Japan rates to levels not seen in 15 years, leading to traders reassessing popular carry trades before the Fed held rates steady but put rate cuts on the table as US inflation cools.

The yen was volatile in early trade, surging nearly 1% to 148.51 per dollar, its highest since mid-March before settling slightly stronger at 149.46. "BOJ normalisation and Fed cut in due course represent a shift from Fed-BOJ policy divergence to convergence," said Christopher Wong, currency strategist at OCBC. "Policy convergence should change the direction of travel for USDJPY to the downside. The risk here is that Fed doesn’t play ball," he said. The BOJ also announced plans to halve its monthly Japanese government bond purchases as of January-March 2026, with Governor Kazuo Ueda not ruling out another hike this year.

The yen surged 7% in July, its strongest monthly performance since November 2022, after starting the month rooted near 38 year lows in large part due to bouts interventions by Japanese authorities that totalled $36.8 billion. Still, the currency is down 5.7% against the dollar this year due to the wide interest rate difference between Japan and the United States. "The BOJ showed it will play its part and this should help stabilize the yen but much of the remaining wide yield differential would need to be closed by the Fed," said portfolio managers from the Multi Asset team at AllianzGI. "In absence of Fed action, JPY shorts may begin to reemerge."

CFTC data shows speculators' bearish bets against the yen are 40% below April's near-seven year high, though at a still elevated $8.61 billion. The dollar index, which measures the U.S. currency against six peers, was down 0.1% at 103.95, having dropped 0.38% on Wednesday. The index fell 1.7% in July, its weakest monthly performance this year. The euro last fetched $1.0834 after rising 1% in July, while sterling was at $1.2852 ahead of the policy decision from the Bank of England, where the central bank could cut rates but markets and economists remain far from certain.

With the Fed staying data dependant, investor focus will be on Friday’s government jobs report for July. It is expected to show that employers added 175,000 jobs during the month, according to the median estimate of economists polled by Reuters. July inflation report will be the next key data and is due to be released on Aug. 14. Markets have been fully pricing in a 25 basis points of rate cut in September for some time and added to wagers of the Fed going big even after Fed Chair Jerome Powell said policymakers are not thinking about a 50-basis-point interest rate cut "right now".

Traders are now anticipating 72 bps of easing this year. "Markets have been expecting more rate cuts than what the Fed’s June dot plot showed going into yesterday’s announcement. And Chair Powell did not seem to provide any opposition to that view," said Charu Chanana, head of currency strategy for Saxo. "This has bolstered market expectations that bigger rate cuts remain likely, and will be heavily influenced by how the economy progresses from here." In other currencies, the Australian dollar was little changed at $0.6531 after sliding 2% in July, while the New Zealand dollar last fetched $0.5954.

South African Rand

Reuters: South Africa's rand strengthened on Wednesday, ahead of a much-anticipated policy decision by the U.S. Federal Reserve. At 1535 GMT, the rand traded at 18.19 against the dollar, more than 0.7% stronger than its previous close. Investors' focus will be on the Fed later on Wednesday for clues to the future interest rate trajectory of the world's biggest economy. The central bank is expected to leave rates unchanged, but markets are betting on a cut at its September meeting.

Like other risk-sensitive currencies, the rand often takes cues from global drivers like U.S. monetary policy in addition to local factors. On the domestic front, South Africa recorded a trade surplus of 24.23 billion rand in June, revenue service figures showed on Wednesday. On the stock market, the Top-40 index closed over 2% up. South Africa's benchmark 2030 government bond firmed, with the yield down 10 basis points to 9.405%.

Global Markets

Reuters: Asian shares rallied on Thursday, tracking a huge revival in global tech stocks helped by Meta and Nvidia, while prospects of imminent policy easing in the U.S. boosted global bonds and commodities. The Federal Reserve held interest rates steady overnight but opened the door to a cut in September. That had traders wagering that the Bank of England might cut later in the day, with the probability of a move at 60%. The yen extended its blockbuster rally, up another 0.8% to a 4-1/2-month high of 148.82 per dollar, having surged 1.8% overnight. The Bank of Japan raised interest rates for the second time in 17 years on Wednesday and signalled more tightening to come.

MSCI's broadest index of Asia-Pacific shares outside Japan climbed 0.7%, after ending July mostly flat. A regional MSCI IT index jumped 2.0% and Taiwan's shares surged 1.7%. Japan's Nikkei however, tumbled 3% as the strengthening yen clouded the outlook for the country's exporters. Chinese blue chips turned 0.3% lower after a private survey showed China's manufacturing sector unexpectedly shrank in July, boding ill for the country's growth momentum. On Wall Street, tech stocks are making an extraordinary comeback after the recent sell-off. Nasdaq futures jumped 1% in Asia as shares of Facebook-parent Meta Platforms surged 7% after the bell on earnings beat. S&P 500 futures also added 0.5%.

Apple and Amazon.com will report their earnings later on Thursday. Nvidia already rallied, adding about $330 billion in stock market value on Wednesday. Also helping the global risk rally is dovish comments from Fed Chair Jerome Powell that policymakers had a "real discussion" about cutting at the July meeting. The central bank also said the risks to employment were now on a par with those of rising prices. As a result, markets, which already bet a September cut is a done deal, are wagering on a 10% chance that the Fed may go for a 50 basis points easing in September.

"It seems to us that the bar is not high for the FOMC to begin easing policy at the next meeting," said analysts at TD Securities in a note to clients. "While we think the bar is high for the Fed to cut by 50bp in September we cannot discard the Fed easing policy at each of the last three meetings of 2024 if inflation continues to come in better than expected." Treasuries rallied to the highest since the first quarter. The yield on 10-year Treasuries rose 2 basis points to 4.037%, having dropped 11 bps overnight.

The dollar's slump against a rampant yen dragged down its broader value against a range of currencies. The dollar index slipped 0.2% to 103.87 on Thursday against its major peers, having fallen 0.4% overnight. In commodity markets, oil prices extended their surge overnight after the killing of a Hamas leader in Iran raised the threat of a wider Middle East conflict. Brent crude futures rose 0.7% to $81.44 per barrel, while U.S. West Texas Intermediate crude futures increased 0.9%, to $78.61 per barrel. They both jumped about 4% in the previous session. Gold gained 0.4% to $2,456.59 an ounce.

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