Yen and Swiss Franc Strengthen Amid Risk-Off Sentiment

Yen Gains Amidst US Tech Stock Sell-Off

The Japanese yen (JPY) has experienced a significant appreciation during the recent Asian trading sessions, causing the USD/JPY pair to drop to an intra-day low of 151.92. This marks a notable decline of nearly 10 big figures from its peak on July 3rd. The next critical support level to watch is around 151.50, coinciding with the 200-day moving average. Historically, this level has acted as a pivotal point; it was breached briefly at the turn of the year before the pair rebounded to new highs.

This week's gains in the yen have been accelerated by a broader risk-off sentiment in the market, prompting a liquidation of yen-funded carry trades. The Swiss franc (CHF), another traditional haven currency, has also outperformed, pushing EUR/CHF closer to the 0.9500 mark. This trend reflects a broader deterioration in investor risk appetite, highlighted by a sharp decline in US equity markets. The Nasdaq 100 index suffered a 3.7% drop, extending its losses since the mid-July peak to over 7%. This decline was exacerbated by disappointing earnings from Tesla, which saw a 12% drop after failing to meet profit expectations and postponing a key product launch.

PBoC's Rate Cuts and Market Reactions

In another significant development, the People's Bank of China (PBoC) unexpectedly cut its one-year medium-term lending facility (MLF) rate by 20 basis points to 2.30%. This was the second rate cut within a week, following a 10-basis point reduction in the 7-day reverse repo rate. The PBoC also injected CNY200 billion into the market, the largest such injection since January. This move indicates a shift in Chinese policymakers' priorities, as they aim to support the country's slowing economic growth and meet the annual GDP target of around 5%.

Interestingly, the Chinese renminbi (CNY) initially strengthened against the US dollar following these rate cuts, which could be attributed to several factors: investor optimism about potential economic recovery, possible state intervention to support the currency, spill-over effects from unwinding carry trades, or a reaction to falling US yields. Nonetheless, the prevailing sentiment suggests a challenging outlook for the renminbi, given the combination of sluggish growth, lower interest rates, and geopolitical uncertainties.

USD/CAD: Impact of Risk-Off Sentiment and BoC's Dovish Stance

The USD/CAD pair has been buoyed by a continuation of risk-off trading, affecting high-beta G10 commodity currencies. The Canadian dollar (CAD) has been under pressure, weakening by 0.9% against the USD so far this month. This decline was exacerbated by the Bank of Canada's (BoC) decision to implement back-to-back rate cuts, lowering its policy rate by 0.25 points to 4.50%. The BoC's dovish stance, highlighted by concerns over excess supply in the economy and downgraded core inflation forecasts, has weighed on the CAD.

Despite stronger recent inflation prints, the BoC emphasized that underlying inflationary pressures are easing. The central bank expects inflation to approach its 2% target, and it appears poised to continue lowering rates toward a neutral range of 2.25% to 3.25% in the coming year. While the BoC's current policy direction contrasts with the Federal Reserve's stance, there are growing expectations that the Fed may also cut rates, potentially as early as the September FOMC meeting, in response to rising unemployment and softer inflation data.

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