Photo/Illutration Banknotes of Japanese yen and U.S. dollars are seen in this illustration picture taken on Sept. 23, 2022. (REUTERS)

SINGAPORE-- The yen was choppy on Thursday after a sharp drop in the previous session in a volatile week that has left sentiment fragile as investors weigh the unwinding of popular carry trades and ponder the rate path Japan’s central bank is likely to take.

The yen was last slightly stronger at 146.09 per dollar, having dropped 1.6% on Wednesday after the Bank of Japan’s Deputy Governor Shinichi Uchida played down the chance of a near-term hike in interest rates.

The Japanese currency started the week by scaling a seven-month high of 141.675 per dollar, a far cry from the 38-year lows it was rooted at in early July as soft U.S. jobs data last week stoked recession worries and roiled investors.

A surprise hike from the BOJ last week also led investors to bail out of carry trades, in which traders borrow the yen at low rates to invest in dollar-priced assets for higher returns, helping to lift the yen.

A summary of opinions voiced at the BOJ’s July policy meeting showed on Thursday that some board members called for the need to keep raising interest rates with one saying they should eventually be increased to at least around 1%.

The contrasting opinions from the summary and Uchida on whether the BOJ will continue to raise rates or pause as a result of market volatility, underscores the delicate task facing the central bank and will likely keep investors skittish.

“While the BOJ may have paused for now, it is likely to continue its journey towards normalizing policy in the coming months,” said Vasu Menon, managing director of investment strategy at OCBC.

“It may be too early to pop the champagne as markets remain vulnerable to the risk of negative news flows and other global uncertainties.”

ANZ Bank’s chief economist Sharon Zollner and strategist David Croy pointed out that even if the Federal Reserve cuts rates by as much as markets are pricing in and the BOJ hikes again, Japanese rates will still be well below their U.S. equivalents.

“So, the carry trade isn’t likely to end any time soon, but we may see more dollar/yen movement as investors trim risk positions,” they said in a note.

The Swiss franc, another currency that was used to fund carry trades, was slightly stronger at 0.8606 per dollar, after an over 1% drop in the previous session.

DEFENSIVE DOLLAR

The sharp moves in the yen has pushed the dollar index, which measures the U.S. currency against six rivals including the yen, to 103.08, near the seven-month low of 102.15 it touched on Monday.

The euro was steady at $1.09285, while sterling last fetched $1.26865, hovering close to the one-month low it touched on Tuesday.

Traders expect the Fed to cut rates by 50 basis points at its next meeting in September as the economy slows, but they are also pricing in a 26.5% chance of a smaller 25 bps reduction, according to the CME Group’s FedWatch Tool.

On Monday, they had at one point fully priced in a 50-bps cut and had even started pricing in the possibility of an emergency rate reduction before the September meeting, though those odds have eased since then as markets stabilize somewhat.

Investor focus will now be on the U.S. consumer price inflation report for July due next week as well as comments by Fed Chair Jerome Powell at the central bank’s Jackson Hole Economic Policy Symposium on Aug. 22-24.

“Investors need to brace for a bumpy ride,” said OCBC’s Menon, noting that there is still another six weeks before the next Fed meeting and “there is a lot of economic data on tap between now and then which could change the odds.”

The Australian dollar was 0.14% higher at $0.65275, while the New Zealand dollar was steady at $0.59985.

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