Summary

Looking back at last week, the future trends of the Japanese yen and the US dollar were mainly driven by the policy factors of the two central banks, with the yen strengthening and the dollar under pressure. Non-US currencies have benefited mainly from the weakening trend of the dollar. For example, the British pound reached a new high in nearly 3 years, and the Canadian dollar achieved the largest weekly gain of the year. Looking ahead to this week, many Federal Reserve officials will give public speeches, and it is worth paying attention to whether their speeches can maintain consistency in dovish statements. In terms of economic data this week, US inflation data, especially the core PCE price index, are particularly important: if the data is higher than expected, the downward trend of the US dollar index may ease. In addition, the performance of US GDP revision and durable goods order data is also worth noting.

Global Forex Review and Fundamental Summary

Fed Chairman Sends Strong Rate Cut Signal, US Dollar Index Falls Sharply

The US dollar index fell to its lowest level since January last Friday, mainly because Federal Reserve Chairman Powell said at the Jackson Hole Symposium that the Fed's confidence in inflation returning to 2% has increased, and hinted that the Fed may cut interest rates in September, or even have an open attitude towards a 50 basis point cut. Powell's dovish comments have also been echoed by other Fed officials, and the market quickly responded to the Fed's dovish comments, leading to a sharp decline in the US dollar index. Before more economic data is released, the US dollar may continue to be under pressure.

UK inflation and other economic data support, pound extends gains and breaks through a high point more than 2 years ago

The pound continued its upward trend last week and reached its highest level since March 2022. The Federal Reserve's dovish turn has led to market expectations that the economic prospects of the UK and the US will continue to diverge, which has pushed up the pound. Although the Bank of England cut interest rates once in August, market expectations are currently that the Bank of England will cut interest rates less than twice by 2024, compared to expectations of rate cuts by the Federal Reserve.

Hawkish comments from Bank of Japan officials shook the market, and the dual factors of economic data drove the yen higher

The Governor of the Bank of Japan made a speech in the parliament last week, stating that as long as inflation and economic data meet expectations, the Bank of Japan will take interest rate actions based on market conditions. The unexpected inflation data in July added variables to the economic outlook, with the consumer price index (CPI) rising 2.8% on a year-on-year basis, exceeding market expectations of 0.1%. The rate hike by the Bank of Japan in July once reversed the downward trend of the yen, so another possible rate hike still has a strong boosting effect on the yen. A recent survey by Reuters showed that 57% of interviewed economists believe that the yen will experience a second rate hike within the year, with expectations for a rate increase in December.

Analysis of forex futures and options trends

2.1 Important forex futures contract trends (chart)

2.2 Analysis of futures market positions

According to the futures market position report released by the U.S. Commodity Futures Trading Commission on August 20, 2024, the overall position change of each currency in the past week is as follows: Euro net short position changed by 5916 contracts, Australian Dollar net short position changed by 5172 contracts, British Pound net short position changed by 1596 contracts, Japanese Yen net short position changed by 4254 contracts, Canadian Dollar net long position changed by 1856 contracts, New Zealand Dollar net short position changed by 956 contracts, and there were no currency with total position change from long to short in the past week. In addition, currencies with one-way position change exceeding 20% include: Euro, Japanese Yen, and Canadian Dollar.

2.3 Outlook for key currency pairs

Tokyo Financial Exchange will reintroduce margin trading of the Chinese Yuan/Japanese Yen.

Since 2022, as people pay more attention to the interest rate difference between Japan and foreign countries, the depreciation of the yen has accelerated and foreign exchange margin trading has increased sharply. According to the data from the Japan Financial Futures Association, the volume of over-the-counter trading exceeded 1 quadrillion yen (1 quadrillion = 1 trillion*10000) from 2022 to 2023. The trading volume as of 2024 has already surpassed the level of the entire year of 2021.

The Bank of Japan raised its policy interest rate from 0-0.1% to 0.25% in July of this year. However, there is still a significant interest rate difference compared to other countries such as Hungary (6.75%) and the Czech Republic (4.5%). It is very common to conduct 'arbitrage trading,' borrowing the low-interest yen and investing in other currencies with higher interest rates to obtain interest rate differential income.

As a result, the Tokyo Financial Exchange hopes to activate the foreign exchange margin trading market by expanding the range of trading currency pairs. In January 2025, the Tokyo Financial Exchange will introduce three new currency pairs for foreign exchange margin (FX) trading. They are the Hungarian Forint, the Czech Koruna, and the Chinese Renminbi against the Japanese yen. Renminbi foreign exchange margin trading was listed from August 2011 to November 2013, but was suspended due to limited trading volume. This time, it is decided to relist it due to China's promotion of the internationalization of the Renminbi.

USD/CAD

The Canadian dollar rose last week, mainly driven by a combination of Canadian retail sales data and the expectation of a rate cut by the Federal Reserve, achieving the largest annual increase and pushing the USD/CAD below the 1.3600 level. Canadian retail sales in June decreased by 0.3% from the previous month, indicating a weakening of consumer spending. At the same time, the market expects the Bank of Canada to cut interest rates again next month. Taking into account the current fundamental situation, as the market has fully digested the expectation of a rate cut for the Canadian dollar, the Canadian dollar may continue to remain strong in the short term. However, due to a lack of further fundamental support, the potential for further appreciation of the Canadian dollar may be limited.