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The Japanese Yen remains the strongest major currency, while the Canadian Dollar has been the weakest so far today. USD/JPY is trading near 153.65, close to yesterday’s seven-month low at about152.89. The pair has not continued lower during today’s Asian session, but the Yen is still holding almost all of its recent gains. This is looking more and more like a significant repricing of the Yen. For USD/JPY, the 152.80–153.00 area is now the key short-term support zone. A sustained move below it would be a strong bearish signal and could trigger another wave of Yen buying, while a recovery above 155.00 would weaken the short-term bearish case.
A Bank of Japan rate hike is now widely expected. Markets expect the Bank of Japan to raise its policy rate by 0.25% to 1.25% at next week’s 17–18 September meeting. The Yen’s advance has been driven by this expectation, by the unwinding of short Yen positions, and by the possibility that Japanese investors may begin repatriating capital
Crude Oil has continued to trade higher and is now very close to $100. Brent Crude is trading near $99.40, its highest level since late June, while WTI Crude is around $94.60. Both benchmarks have risen for a fourth consecutive session as intensifying US-Iran fighting has increased concerns about supplies and shipping through the Strait of Hormuz. The global rally in the price of Crude Oil is stoking concern over potential inflationary and central bank rate hiking pressure returning. This could change rapidly if we see some moves toward de-escalation soon.
The US Dollar continues to weaken. The Dollar Index has fallen for a third consecutive day and is trading around 98.8, despite markets still pricing approximately a 60% probability of a 0.25% Fed rate hike next week. The market appears more focused on uncertainty around inflation and geopolitical risk than on the recent very strong US jobs report.
Agricultural commodities remain broadly bullish, but Wheat has corrected sharply. Corn, Soybeans, and Sugar remain in long-term bullish trends, supported by sizeable speculative buying. However, Wheat has fallen by roughly 10% over the past three sessions before rebounding, which is a useful reminder that even strong commodity trends can experience deep and sudden pullbacks. Trend traders will still be long of Soybeans and Sugar, as going long of commodities breaking to new multi-month highs have historically been a very profitable trend trading strategy.
Friday’s US CPI release remains the most important scheduled event this week. US Inflation data will likely determine whether markets increase or reduce their expectations of a Fed rate hike at next week’s meeting. Higher-than-expected inflation would probably support the Dollar and hurt Gold, while a softer reading could deepen the Dollar’s current decline.