Recovery, or Whipsaw?

JP Morgan has told Bloomberg the carry trade capitulation is only 50% complete. The U.S. Dollar climbed back on Thursday as new labour market figures revealed a steeper-than-expected fall in the number of those claiming unemployment, which helped to relieve fears of a recession. The Dollar fought back against the Yen yesterday after a market session that likely tested the most experienced traders and investors. The struggle continues with the unwinding of popular carry trades and attempts to bet on changes in Japanese monetary policy.

Initial jobless claims in the U.S. came out about 8K less than expected (which is typically bullish). Analysts said fears of a softening labour market could have been overdone. The Dollar eased 0.37% versus the Yen to trade at 147.205, after falling 1.6% on Wednesday following a speech by Bank of Japan Deputy Governor Shinichi Uchida in which he tried to play down risks of a near-term interest rate hike. He also played down speculation of a cut, trying to make their position look as concrete as possible.

The Yen's sharp swings helped the Dollar index reach a high for the week, but the upward swing has lost steam as of now. The weekly candle now sits as a dragonfly doji (a popular sign of price reversal). Despite this, general price volatility makes a counterargument as it is a sign of increased risk in a market.

The Yen was rallying to a seven-month peak at the start of the week, with 141.675 per Dollar, regaining lost ground since a 38-year trough it hit in early July. This comes just after weaker-than-expected U.S. job figures increased fears of recession and dampened market sentiment. Of course, as we covered Monday, Yen gains came mostly due to the surprise rate increase from the Bank of Japan last week, compelling investors to unwind carry trades. Carry trades involve borrowing Yen at low interest rates and reinvesting the funds in higher-yielding Dollar assets.

A summary of opinions from the BOJ's July policy meeting, released Thursday, showed some board members believed that rates should continue to rise, with one suggesting they should ultimately reach around 1%.

Some analysts believe there's further to go in the unwinding of carry trades, with potential to keep pushing market turbulence. Depending on how extensive the expected rate cut from the U.S. Federal Reserve turns out to be in September and how much more the BOJ continues to hike rates, there could still be an incentive to use the Yen to fund other trades. Another funding currency is the Swiss franc, often utilized for carry trades, which was down 0.47% at 0.866 to the Dollar after having dropped over 1% on Wednesday. The euro was off 0.05% at $1.0917, and sterling was up 0.48% at $1.275. From here on, investors will look to the U.S. July consumer price inflation data to be published next week, and Federal Reserve Chairman Jerome Powell's speeches at the August 22-24 Jackson Hole Economic Policy Symposium.