It’s a super busy first week of August when many trading desks kick off their holidays. As always at this time of year, summer liquidity can cause volatile price action due to thinner volumes. This is especially true with major risk events on the calendar, and they don’t get much bigger than the monthly US jobs data, FOMC, Bank of Japan and Bank of England meetings, together with megacap tech earnings as four of the “Mag 7” report their latest results.
The last (summer) hurrah for central banks sees the BoJ and BoE meetings both priced as something close to a coin flip. That means those events will be market movers pretty much by definition. The former will be really interesting as a hike seems the likely option, plus an expected reduction in JGB purchases. Most importantly, that has seen the carry trade, a powerful force in markets over the past two years+, reevaluated and caused big volatility in USD/JPY and other markets. The carry trade is where investors borrowed in yen to fund purchases of higher yielding currencies. This had pushed bets versus the yen to their most extreme in nearly two decades.
But the recent unwind has resulted in some forced selling of assets in other markets, adding fuel to a sharp sell-off in global tech stocks. The yen is currently on course for its best month of the year, which all sets the scene for more volatility around this week’s risk events. Big resistance in late 2022 and 2023 around “yentervention” at 152 in USD/JPY has now become huge support as prices rebounded off here last week. Everyone is now watching this megapivot level. A major break to the downside would see further massive unwinding of speculative currency positions with the market still short yen, and a potential further shift in risk appetite. If the BoJ decides not to hike and offers only cautious guidance, there appears little resistance to the yen falling back.
The Fed meeting may still want some flexibility to assess a September move, with two more rounds of inflation before then. Do they have greater confidence that inflation is moving to its target and so can tweak the statement? More explicit guidance might then be warranted at Jackson Hole in late August. The “finely balanced” BoE decision in June, for seven of the nine MPC members, will be in focus at Thursday’s meeting. Data has been mixed so officials may want to also evaluate further evidence. A fresh monetary policy report with updated forecasts could tee up a September cut more explicitly.
Finally, Big Tech companies have recently been sold with rotation into more value-oriented sectors of “historic proportions”. The most crowded fund manager trade had been long tech stocks so any sell-off was always likely to cause volatility. Consensus estimates have Q2 tech earnings growing 18% y/y compared to 2% for the rest of the S&P 500. Their fortress-sized balance sheets should help underpin support for the stocks over the long-term. But price action could be highly volatile with so many risk events across this prime summer week.
