Last Thursday, the Bank of Japan may have intervened in the currency market to support the battered yen.
This kind of intervention could be made easier in future with a possible change in US monetary policy from the Federal Reserve. In times of rising or high interest rates, US equities in particular benefit as liquidity returns to the dollar. When interest rates fall, this liquidity flows out of the dollar and moves into alternative investment opportunities worldwide. The yen could now benefit from this redistribution.
Investors speculating that the Fed could cut interest rates soon had their eyes on recent US inflation and labour market data. After Fed chief Jerome Powell's cautious stance, attention will shift to upcoming comments from Federal Open Market Committee members, as the recent inflation data could signal a potential monetary policy shift.
The yen/gold correlation is back
After US consumer prices were released last Thursday, USD/JPY fell by over 2% amid rumours of interventions from the Japanese Ministry of Finance. If last week's trends – driven by lower CPI and expectations of a Fed rate cut – continue, the yen could rise with gold prices towards all-time highs.
Hedge funds currently hold few long yen positions; only short positions that need to be covered in the event of a short squeeze. If the yen continues rising, hedge funds could face increased pressure to reduce their positions. Historically, a strong yen has positively correlated with gold, suggesting gold could also benefit.
What could be next for gold?
Over the past three months, gold has consolidated between $2,431 and $2,290 an ounce. Since early July, investors have attempted to break above this range, which could push prices towards $2,700. Conversely, if gold falls below $2,290, it may correct further to $2,220 and $2,189.
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