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Volkmar Baur at Commerzbank notes that the Japanese Yen has weakened again above 159 per Dollar despite recent intervention and Bank of Japan signals. He argues JPY is fundamentally too weak, with strong current account and credit data, but rising Japanese equities and associated hedge adjustments may keep JPY under pressure until the Bank of Japan clarifies its rate-hike plans.

Fundamentals strong but pressure persists

"Speaking of intervention, the Japanese yen rose above 159 against the U.S. dollar again yesterday, indicating that it has weakened once more in recent days. This was to be expected."

"Following the Bank of Japan’s meeting, we had already noted that the Bank of Japan would need to send clearer signals that it is considering raising interest rates more quickly than it has so far."

"Governor Ueda did give subtle signals during his press conference. And the “summary of opinions” released yesterday also contains indications that the bank could raise interest rates more quickly. However, the market still seems to find this somewhat insufficient."

"According to a survey by the Japan Exchange Group, around 35% of Japanese stocks are now held by foreign investors. Since these Japanese stocks are largely held in currency-hedged positions, rising stock prices (the Nikkei is up 35% this year) require corresponding adjustments to currency hedges, which tends to weigh on the JPY."

"While this is likely not the main reason, it could also contribute to the JPY coming under pressure again in the coming weeks until the Bank of Japan clarifies its plans more clearly."

"We remain convinced that the Japanese yen is currently trading too weakly and should be somewhat stronger on a fundamental basis. This was evident again yesterday in robust figures for the current account and credit growth. At the same time, days like yesterday show that rising stock prices can contribute to a weakening of the currency."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• USD/JPY holds steady as a firmer US Dollar and elevated Oil prices weigh on the Japanese Yen.
• The Yen struggles to build on recent intervention-driven gains despite signs that the BoJ could raise rates again in September.
• Traders await US CPI data for fresh clues on the Fed’s next move.

USD/JPY treads water on Tuesday as the Japanese Yen (JPY) struggles to find its footing, facing headwinds from a firmer US Dollar (USD) and elevated Oil prices. At the time of writing, the pair trades around 159.24 after hitting an intraday low of 158.92.

Rabobank’s strategists observe that “the joint Japanese-US intervention in the JPY exchange rate is starting to lose its grip on the currency.” While “the prospect of further FX interventions continues to provide some support,” they point out that “USD/JPY is gradually drifting higher, and the currency has reversed about half of the peak-to-trough move versus both EUR and USD.”

Plans to reopen the Strait of Hormuz remain uncertain, even as talks between Iran and Oman have moved to an advanced stage, according to Qatar’s Foreign Ministry spokesperson. Earlier, Iran outlined several demands from the US, including lifting sanctions, releasing frozen Iranian assets, ending military threats and removing the naval blockade.

Higher Oil prices are raising concerns about the inflation outlook and supporting expectations that the Federal Reserve (Fed) may need to raise interest rates. The CME FedWatch tool shows a 51.9% chance of a rate hike at the September meeting.

Hawkish Fed expectations and geopolitical tensions are helping the US Dollar hold near its recent lows. The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, trades around 99.85.

On the data front, the ADP Employment Change four-week average fell to 8.25K from a downwardly revised 11K. Traders now await Wednesday’s US Consumer Price Index (CPI) data.

Meanwhile, elevated Oil prices are likely to keep the Japanese Yen under pressure in the near term, given Japan’s heavy dependence on imported energy.

Rabobank reiterates that “these FX interventions may prop up the currency temporarily, but it will probably not last unless there are structural improvements in the yen’s fundamentals,” adding that “the government’s plans are unlikely to do this in the near-term.”

In addition, Rabobank highlights that “interest rate differentials are also weighing on the currency,” even as the BoJ begins to signal a willingness to address this. The bank notes that “sources within the Bank of Japan told reporters that policymakers could raise rates again in September,” comments which “follow a relatively hawkish write-up of the July meeting.”

• US private employers added an average of 8.25K jobs per week in late July.
• Job gains lose further momentum, adding to the previous week’s pullback.

Private-sector hiring in the US has further cooled in late July. According to the NER Pulse, the weekly companion to the ADP National Employment Report, companies added an average of 8.25K jobs per week in the four weeks ending July 25.

That marks another pullback from the prior reading (11K), showing an extra impasse in hiring.

Market reaction

The Greenback clings to its daily gains, building on Monday’s uptick and prompting the US Dollar Index (DXY) to trade just below the psychological 100.00 barrier.

Brown Brothers Harriman’s (BBH) Elias Haddad reports the Reserve Bank of Australia (RBA) delivered a less hawkish hold, keeping rates at 4.35% and judging policy “somewhat restrictive” as the labor market has eased more than expected. Haddad notes the RBA softened its hawkish bias, raised the bar for further hikes, and saw AUD/USD briefly dip before recovering during Governor Bullock’s press conference.

Carry and commodities support Aussie

"RBA delivered a less hawkish hold. As was widely expected, the RBA kept the policy rate at 4.35% for a second straight meeting. The decision was unanimous, with the Board judging policy to be “somewhat restrictive” and noting that “labour market conditions have eased by a little more than expected in recent months.”"

"The RBA softened its hawkish bias. It reiterated that “inflation is still too high”, adding that “risks to inflation are judged to be skewed to the upside.” But the guidance was tempered at the margin with the Board now prepared to “increasing the cash rate further if upside risks [to inflation] materialise”, rather than simply “if needed” previously."

"Indeed, the RBA’s updated forecasts raised the bar for another hike. The RBA raised its unemployment rate projection across the forecast horizon and lowered its policy-relevant trimmed mean inflation projections through June 2027."

"AUD/USD dipped briefly following the policy decision but recovered most of the losses during RBA Governor Michele Bullock’s press conference. Bullock highlighted it was “quite possible” that a further rate hike would be needed, pointing out that Australia’s economy is still operating above capacity."

"Bottom line, attractive carry alongside Australia’s strategic exposure to commodities linked to energy, AI, and defense remain key AUD tailwinds."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• Silver loses more than 2% on Tuesday after hitting a seven-week high on Monday.
• Rising Oil prices revive inflation concerns and strengthen expectations of higher interest rates.
• Negotiations surrounding the Strait of Hormuz and US inflation data remain in focus.

Silver (XAG/USD) extends its correction on Tuesday and trades around $65.05 at the time of writing, down 2.31% on the day. The white metal retreats from the seven-week high reached at $66.59 on Monday as rising Oil prices and prospects of tighter monetary policy in the United States (US) weigh on precious metals.

Oil prices have risen sharply since the beginning of the week as negotiations aimed at reopening the Strait of Hormuz remain uncertain. Iran is conditioning the reopening of this strategic maritime route on several demands from Washington, including the payment of war reparations and the lifting of sanctions.

Some signs of easing tensions are nevertheless emerging. Qatar says on Tuesday that negotiations between Oman and Iran have reached an advanced stage and that it has received positive feedback from both sides. Doha stresses, however, that the talks are at a critical juncture, maintaining uncertainty over the prospect of a swift agreement.

This situation supports energy prices and revives concerns about US inflation. West Texas Intermediate (WTI) trades around $81.20, up more than 5% since the beginning of the week, despite the daily decline. Higher Oil prices are also helping to keep US Treasury yields elevated, reducing the appeal of Silver, a non-yielding asset.

Against this backdrop, investors are increasing their expectations of further monetary tightening by the Federal Reserve (Fed). According to the CME FedWatch tool, markets now estimate a 52% chance of a 25-basis-point interest rate hike at the September meeting, up from approximately 44% the day before.

Comments from Cleveland Federal Reserve (Fed) President Beth Hammack are also fueling these expectations. Hammack said on Monday that current monetary policy “is not hurting the economy” and argued that the Fed will need to raise interest rates more than once to bring inflation back toward its target.

These prospects provide some support to the US Dollar (USD) and represent an additional headwind for Silver. A stronger US Dollar tends to make the white metal more expensive for investors using other currencies, while higher interest rates increase the opportunity cost of holding non-yielding assets.

Investors now turn their attention to the US Consumer Price Index (CPI) data due on Wednesday. Stronger-than-expected inflation could reinforce expectations of a September rate hike and maintain pressure on Silver. Conversely, easing price pressures could reduce expectations of monetary tightening and provide support to the precious metal.

OCBC’s Sim Moh Siong and Christopher Wong note the US Dollar (USD) softened as Fed hike expectations moderated and the US yield curve steepened. They argue that without a strong upside surprise in United States (US) Consumer Price Index (CPI), the USD should stay rangebound, supporting carry trades. Debasement concerns and scrutiny of Fed independence are seen underpinning Gold, while upcoming US CPI, PPI and retail sales will steer Fed expectations.

Dollar tied to upcoming CPI data

"The USD softened over the past week as Fed rate hike expectations moderated and the US yield curve steepened. Unless this week's CPI report delivers a meaningful upside surprise, the USD is likely to remain trapped in narrow ranges. July's soft payrolls report should keep the Fed patient beyond September, with markets unlikely to price a September hike as the base case without a firmer inflation signal."

"In our view, core CPI would need to print at 0.3% MoM or higher in July, above the 0.2% consensus forecast, to materially lift expectations of a September rate hike. A rangebound USD, combined with a constructive risk backdrop, should continue to support carry trades despite ongoing volatility in oil markets. Oil prices eased on hopes that the Strait of Hormuz could reopen, but Iran's firm conditions for Washington suggest any near-term boost to energy supply is likely to be limited."

"Meanwhile, debasement concerns have returned to the fore, adding pressure on the USD and helping gold rebound from what increasingly appears to be a floor near USD4,000/oz. Several recent developments have renewed scrutiny over Fed independence."

"First, the Trump administration reportedly made another attempt to remove Fed Governor Lisa Cook. If successful, President Trump would gain an additional opportunity to appoint a Fed governor. Cook has until 26 August to respond. Second, the Wall Street Journal reported that President Trump has maintained frequent contact with Fed Chair Kevin Warsh, discussing issues ranging from Iran to AI. While there is no evidence that monetary policy has been directly influenced, the relationship appears less distant than the convention typically observed between the White House and the Fed."

"Following the weak July payrolls data, we do not believe a Fed decision to keep rates unchanged in September would be viewed as a credibility issue. However, if inflation remains sticky, the September meeting could become an important test of the Fed's inflation-fighting credentials. In that scenario, the USD outlook will depend heavily on whether policymakers choose to reinforce their inflation mandate through tighter policy."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)