What’s going on here?
The Japanese yen reached a 2.5-month high against the dollar as investors flee falling global stocks, gravitating toward traditionally safe assets like the yen and Swiss franc.
What does this mean?
Investors have been shedding their short positions on the yen, turning to safe havens amid declining global stocks. This flight to safety, coupled with the yen’s rise, contrasts with a mixed economic scene in the US. The American economy surprised with a 2.8% annualized GDP growth in Q2, outperforming the expected 2.0%. Initial unemployment claims dropped to 235,000, beating expectations slightly. Yet, durable goods orders fell by 6.6% in June, contrary to an anticipated 0.3% rise. The PCE price index showed a slower pace of inflation at 2.9% in Q2, down from 3.7% in Q1. Despite these mixed signals, the chance of a Federal Reserve rate cut next week has remained low, now under 10%.
Why should I care?
For markets: Safe bets in uncertain times.
With global stock markets on shaky ground, the yen and Swiss franc have become go-to assets. Investors’ unwinding of short positions on the yen could alleviate pressure on other currencies, like the Australian dollar, New Zealand dollar, and Mexican peso. This short-covering might help stabilize these currencies. Additionally, there’s a growing belief in a Bank of Japan rate hike, with rate futures now showing a 67.2% chance, a significant jump from earlier this week.
The bigger picture: US economic surprises and global responses.
The robust 2.8% GDP growth in the US was a bright spot, hinting at resilience despite economic challenges. However, falling durable goods orders and mixed inflation data keep the outlook complex. The Australian dollar hit a low, while the Chinese yuan rallied, influenced by the yen’s strength and despite the People’s Bank of China’s efforts to stimulate the economy with lower lending rates. These dynamics highlight how intertwined global economies remain, reacting to shifts in currency strengths, economic reports, and central bank policies.
