Traders short the US dollar before the Jackson Hole Federal Reserve annual meeting, causing a surge in the Japanese yen

On Monday, the US dollar fell to a seven-month low, while the yen hit a more than one-week high. Traders are awaiting comments from Federal Reserve Chairman Jerome Powell this week, expecting these comments to signal that the Fed will begin cutting interest rates in September. Another key focus will be whether Powell indicates that rate cuts may occur at every meeting in the future, but the market may be overestimating the extent and speed at which the Fed may act. Powell may still be reluctant to commit to any details this week, as inflation and employment data for August are yet to be released before the Fed's September meeting.

According to the FedWatch Tool from the Chicago Mercantile Exchange Group (CME Group), traders believe there is a 23% probability of a 50 basis point rate cut in September, down from 50% a week ago, while the probability of a 25 basis point cut is 77%. It is expected that rates will be cut by about 210 basis points by the end of 2025.

Data to be released on Wednesday will show revisions to government employment data from April 2023 to March 2024, which could impact Powell's comments on Friday.

"Powell has indicated that the Fed is closely monitoring signs of deterioration in the labor market and is ready to intervene when necessary," said Quincy Krosby, Chief Global Strategist at LPL Financial, in a note on Monday. He added, "If the report shows a significantly lower number of jobs created than initially reported in the monthly employment report, Powell's concerns may be amplified in his comments."

The upcoming release of the July FOMC meeting minutes will also be closely scrutinized for new clues about the expected rate trajectory.

Currently, options traders are betting on further downside for the US dollar, as they anticipate Powell reinforcing the case for rate cuts at the Jackson Hole central bank symposium.

The risk reversal index for a basket of currencies against the US dollar shows that the cost of options betting on the dollar falling in the next week or month is higher than those seeking an increase.

Hedging against a dollar decline is more costly than hedging against a dollar rise.

"This means traders are preparing for a dollar decline ahead of the Jackson Hole central bank symposium and the Fed's September monetary policy statement," Bloomberg's dollar exchange rate index shows a 1.6% decline in August so far, hitting a five-month low on Monday.

Meanwhile, the emerging market currency index climbed to a record high on Monday. Barclays' New York strategist Erick Martinez said, "Based on the latest US data, we are back to the scenario of a soft landing in the US. We see currencies that were sold off amid concerns about a US economic recession rebounding." Ulrich Leuchtmann, head of foreign exchange research at Deutsche Bank, stated in a report: "The expected rate cut cycle for everyone should not be a particularly relevant thing. But the fact is that everything is related to the speed of rate cuts."

Following the selling pressure, the US dollar fell against almost all G10 currencies and emerging market currencies. Just as some observers were discussing the recovery of yen carry trades, the yen suddenly rose.

Amundi stated that with the end of historic weakness, the yen will appreciate to 140

On Monday, the yen against the US dollar rose 1.7% to 145.19 during the trading session, before narrowing its gains. Amundi stated that with the end of historic weakness, the yen against the US dollar will appreciate to 140.

Shinichiro Arie, Chief Investment Officer of the Japanese division of this largest asset management company in Europe, said that with the narrowing of the yield spread between Japan and the United States, the exchange rate of the yen against the US dollar may reach 140 in the next 12 months. He said: "We believe that the yen will not weaken in the future."

He believes that the possibility of the Fed starting to cut interest rates provides an opportunity to build up long yen positions, and he said that the Bank of Japan may raise interest rates again this year. However, due to currency volatility, it is best not to hold a large amount of yen positions immediately.

At the time of Amundi's call, hedge funds have turned bullish on the yen for the first time since 2021, as yen-centered carry trades have already collapsed. First Eagle Investment Management LLC expects the Bank of Japan to raise interest rates again this year, believing that the interest rate differential has peaked, thus abandoning hedging against the yen. M&G Investment Management still maintains a relatively high position in the yen