Investing.com — Betting on the dollar against the yen has been the hot currency trade that has dominated flows, but the trade could now take a “treacherous” path, Macquarie warns, as Japan is likely to follow the intervention of last week that led to a spike in the Japanese currency amid renewed expectations for U.S. interest rate cuts.
“It is treacherous to go long from a tactical point of view,” Macquarie said in a note on Monday, warning that Japan’s finance ministry will be more likely to intervene if it sees “any chance of a spike in US-Japan yield differentials “, which drives interest rates. the appreciation of the yen, following Friday’s US employment report.
The weaker-than-expected April jobs report, released on Friday, revived hopes for a faster rate cut, with overnight markets now expecting a rate cut in September rather than December, as the economy not only created fewer jobs than expected last month, but also wage growth also slowed.
The data shows that supply and demand for labor are becoming better balanced. justified Fed Chairman Jerome Powell’s recent comments that the labor market is not that tight
That used to be the case, Macquarie added.
After the peak in labor supply, supported by Given the strength of the immigration flow, the focus should now shift of ‘job growth by measures of turnover and wages to measure the Fed’s attitude,” Macquarie said.
This new supply-and-demand paradigm in the labor market has helped support payroll and make the labor market more competitive, keeping wage growth and employee turnover in check despite the cooling labor market tightness.
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‘We’re pretty sure that this is a cooler labor market than a year ago. But that’s not due to job growth rates; it is by virtue of the turnover and wage figures,” Macquarie added.
Further signs of a cooling labor market in coming months could boost hopes for rate cuts and fuel expectations that US Treasury yields have peaked, opening the door for further intervention from Japan to boost the yen.
However, recent data suggests that yen short sellers were not cowed into submission by Japan’s recent impromptu foray into the foreign exchange market, while interest rate hikes rather than interventions were expected to be needed to halt the yen’s decline .
There was only one “small reduction” in speculative short positions in the JPY as of last week’s CFTC reports on traders’ positions, Macquarie said, indicating that those who do his long USD/JPY” appears not to have been at intimidated by the currency interventions of the Japanese Ministry of Finance and the BoJ.”
But the risk of further intervention could ultimately shake dollar buyers against the yen the reward-risk ratio for “going long USD/JPY has become even less attractive,” according to Macquarie. “We suspect that more speculators will have unwound their long USD/JPY positions by the end of last week this week,” it added.
