BoJ Summary of Opinions reveals hawkish mood

The yen remained in the spotlight yesterday, with dollar/yen extending its recovery by as much as 2.5% after Bank of Japan Deputy Governor Shinichi Uchida played down the chance of another rate hike soon.

However, the recovery in dollar/yen was halted today as the Summary of Opinions from the latest BoJ decision revealed that some policymakers called for the need to continue raising interest rates, with one member saying that they should eventually be increased to at least 1%.

This revealed a different opinion to Uchida’s and encouraged market participants to add to their rate hike bets. From 74%, the probability of another 10bps hike by the end of the year went almost to 80%

Overly dovish Fed rate cut bets

The yen enjoyed massive flows lately due to a cocktail of developments, like the unwinding of carry trades, the larger-than-expected hike by the BoJ, as well as fears of a recession in the US, which prompted market participants to ramp up their Fed rate cut bets.

According to Fed funds futures, they are now expecting 110bps worth of reductions by the end of the year. On Monday, they were seeing 125, but the improvement in the ISM non-manufacturing PMI and the encouraging Atlanta Fed GDPNow model for Q3 encouraged them to scale some bets back.

The next test for Fed cut bets may be next week’s US CPI and retail sales data for July. However, even if the data points to some further slowdown in inflation, the dollar is unlikely to be massively sold as rate cut expectations suggest an already overly dovish positioning. Therefore, should traders get more signs that the US economy is not on the verge of recession, the greenback could even rebound somewhat.

Wall Street in the red, gold rebounds somewhat

Wall Street finished another session in the red with the Nasdaq losing around 1%, as tech firms saw their stocks sliding towards the end of the session.  The indices began the day higher, but they lost their momentum during the afternoon.

Perhaps the overcrowded short yen trade was not only aimed at benefiting from the higher-yielding dollar, but also at turning those dollars into stocks. Therefore, for Wall Street’s engines to start heating up again, dollar/yen may need to further recover, which could happen should market participants become less worried about the state of the US economy, even if that means fewer basis points worth of expected rate cuts.

Gold is slightly higher today, but still way off its record highs. The fact that the precious metal failed to gain during this turbulent period suggests that it was not a safe-haven choice for investors. Even after the weak US jobs data, gold failed to take advantage of the tumbling dollar and Treasury yields.

Perhaps it is all coming down to China again, as yesterday, data revealed that the People’s Bank of China held back from buying gold for a third consecutive month in July. On top of that, the fact that the Shanghai benchmark price of gold is declining faster than international prices suggests that retail demand in the world’s second largest economy is also cooling.