Speculative buying of the yen is waning in the foreign exchange market, pushing the Japanese currency down near 150 against the US dollar, as expectations of a major interest rate cut by the US Federal Reserve (Fed) have eased following surprising jobs data released last week.
The US dollar rose against major currencies on Friday in the New York foreign exchange market, including the yen, temporarily reaching 149 yen to the US dollar for the first time in about a month and a half.
According to the CME FedWatch tool, which tracks the price of federal funds futures, expectations for a 0.5% rate cut at the next FOMC meeting in November have disappeared. About 97% of forecasts are for the usual 0.25%, while the remaining 3% expect no cut in the near term.
Even before the release of the jobs report, some in the forex market had begun to expect a short-term weakening of the yen and a strengthening of the US dollar.
As of October 1, net yen buying by non-commercial sectors such as hedge funds reached 56,772 contracts, equivalent to 709.6 billion yen ($4.8 billion), according to the U.S. Commodity Futures Trading Committee.
That was down 14 percent from the previous week, when net yen buying rose to its highest since October 2016.
Notably, last Wednesday, Japanese Prime Minister Shigeru Ishiba surprised everyone by saying, "I personally don't think we're in an environment that's conducive to raising interest rates any further." While Ishiba had previously expressed no reservations about normalizing monetary policy, the market now believes the Bank of Japan faces higher hurdles to raising interest rates further.
The prospect of a US interest rate cut is a major factor affecting currency markets.
Several senior Fed officials are scheduled to speak this week, and September U.S. CPI data is due out on Thursday. The Fed and the market will shift their focus from employment-related indicators that are showing resilience to whether inflation is cooling.
Akira Moroga, chief market strategist at Aozora Bank, said that if the US CPI data exceeds market expectations and rumors of a rebound in inflation emerge, it is likely that interest rates will be cut only once this year.
Another factor is whether traders continue to trade the yen carry, in which investors profit from the interest rate differential by buying low-yielding yen and investing in high-yielding dollars.
The yen quickly returned to its low of 148.69 yen to the dollar today. The yen carry trade boom was the driving force behind the yen's decline from 140 yen in early 2024 to 161 yen in July. The yen's weakening trend is likely to continue.
