Is it Time to Buy USDJPY After the Huge Dip? Is it Still Worth the Carry Trade?

The U.S. economy has been showing some unexpected strength, especially with recent retail sales figures surprising on the upside. This has eased fears of a severe economic downturn soon. As a result, people are no longer expecting the Federal Reserve to slash interest rates drastically, which has changed the mood in the markets. This shift has led to renewed selling of the Japanese yen (JPY) against the U.S. dollar (USD) and other major currencies. However, despite this trend, the recent sharp drop in the USD/JPY exchange rate—something we haven’t seen since the chaos of the 2008 Global Financial Crisis—has caused quite a stir in financial markets, making investors rethink their strategies.

USA Retail Sales 

 Source: Investing.com Given the dramatic drop in the USD/JPY rate, many in the market are likely eyeing the yen as a potential buy, hoping to profit from a possible bounce-back. The current volatility in the forex market underscores how unpredictable currency movements can be but also opens the door for the euro (EUR) and British pound (GBP) to strengthen against the dollar (I’ve made a week ahead analysis on this link: where you can check my opinion on the GBP and EUR for this week). Looking ahead, the upcoming Jackson Hole Symposium, where Federal Reserve Chair Jerome Powell and other central bankers will speak, could be a game-changer. Their insights might set the tone for future market trends, especially now that global monetary policy is at a critical turning point.

USDJPY H1 Chart 

 Source: Finlogix Charts Focusing on the yen, it seems the U.S. economy might avoid a severe downturn, which is making market players adjust their expectations about what the Federal Reserve will do next. Instead of expecting big rate cuts, the consensus has shifted to anticipating a more modest reduction—likely around 25 basis points—at the next Federal Open Market Committee (FOMC) meeting. Over the next year, projections now suggest a total of 200 basis points in rate cuts, which would bring the real policy rate closer to what’s considered neutral. This points to a softer slowdown for the U.S. economy, though it might come with increased market volatility. That, in turn, could make carry trades—where investors borrow in a low-yielding currency like the yen to invest in higher-yielding assets—less attractive, which has historically weakened the yen.

It’s important to remember that the recent turmoil in the forex market isn’t just about the Bank of Japan’s (BoJ) actions, although they certainly play a role. Other factors, like signals from the Federal Reserve about possible rate cuts, weak U.S. job market data, and broader global economic uncertainties, have also contributed to the recent turbulence. All these elements have led to the unwinding of yen carry trades. The significant market moves on August 5th, with major selloffs in Japanese stocks and yen short positions, point to a substantial liquidation of carry trades. Both foreign and domestic investors reacted, with some seeing the dip in stock prices as a chance to buy back in.

Despite the recent volatility, some investors still see value in carry trades. However, if the forex market remains volatile, we could see more of these positions being unwound in the coming months. Retail margin traders and institutional investors have already started pulling back from foreign markets due to the high cost of hedging, showing just how uncertain the outlook is. The steep decline in USD/JPY is likely to have lasting effects on market behaviour, potentially leading to a stronger yen as investors reassess and adapt their strategies in response to these shifting conditions.

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