USDJPY Rate Acting as a Global Risk Barometer

Right now, it’s looking like a toss-up between a 25bp or 50bp cut as the likely outcome at the next Fed meeting. Unless we see a real drop-off in the macro data in coming weeks, the US central bank may still lean toward the milder quarter point cut option so as not to show any signs of panic to the market. Whatever the case, it is fair to say that all key US data between now and the September FOMC meeting will be viewed through the lens of how it impacts the size of that first long-awaited rate cut (…in this cycle).

In the aftermath of the BOJ’s latest rate hike (on July 31st), the USDJPY rate has essentially become a barometer for global risk sentiment. The recent plunge of the USDJPY rate (falling from around the 152 level to the 142 level) coincided with the rout on the Nikkei and subsequent global equity sell-off as the unwinding of carry trades impacted the markets. Since then, the recovery of the USDJPY rate (back to the 147 level) has happened at the same time as the Nikkei and global equity markets have bounced back.

So, why the big turnaround? The Deputy BOJ Governor Uchida last week effectively put a stop to the yen carry trade mass unwinding event by stating that the BOJ wouldn’t be looking to hike again anytime soon given the high volatility levels. This sentiment from the Deputy BOJ Governor had a calming effect on global markets, so if we are looking for someone to thank for stopping the panic selling from last week, then the Deputy BOJ Governor is probably high on the list.

Gold has been on the march higher this week courtesy of a softer USD and descending treasury yields. After finding solid support last week in the $2380-$2390 region, gold has regained its footing this week ahead of anticipated monetary policy loosening from the FOMC next month. As of Asian trading hours on Wednesday, spot gold was seen at $2466, with support sitting at $2450 and $2432, while resistance awaits at $2478, a level which would need to be overcome for the precious metal to make a potential run at the $2500 level.

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Oil dipped on Tuesday, but the price is still up 8% from the lows of last week. Some risk-premium has been built back into the crude price with tensions on the rise between Israel and Iran, with the world waiting to see what if any retaliatory action Iran may take and how any subsequent actions could impact oil supply. The oil market is tough to get a read on at the moment given the uncertainty over what could come next on the geopolitical front in the Middle East. Whether we see escalation or de-escalation in this geopolitical hotspot and oil producing region could determine which side of the $80 level (for US crude) oil will be trading at in the near term.