Japan’s stocks surged on Friday, led by the Nikkei 225, which climbed over 3%, marking its best week in four years. This rally was fuelled by positive momentum from Wall Street, where strong economic data eased fears of a recession and suggested the U.S. might achieve a soft landing. Contrary to some reports suggesting a return to the carry trade, this is more reflective of how foreign exchange markets function. Since 2006, traders, both human and algorithmic, have closely monitored the yen, reacting instantly to global market movements. When risk assets rise, so does X/JPY, and vice versa, creating a self-fulfilling cycle. This cycle reflects a “risk on” trade, likely leading to continued support for USDJPY, with cyclical currencies gaining traction, funded by the yen.
The situation has grown more complex following the Bank of Japan’s (BoJ) recent dovish stance, which stabilised market conditions. This could push the BoJ towards policy normalisation, especially as the yen approaches the 150 level. The changing market rules now present what might seem like a crisis as a golden opportunity, driven by central banks’ influence on market sentiment. While a rate hike in September appears unlikely, particularly after the recent turbulence in Japanese equities, the probability of a hike by the end of 2024 has risen from 0% to 30%. The market is beginning to anticipate a potential shift in BoJ policy as the economic environment evolves. The yen’s movements remain crucial in the global financial landscape, with attention focused on the BoJ’s forthcoming decisions, which may limit further gains in USDJPY.
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