The Japanese yen has experienced significant appreciation against the US dollar since late July, following intervention by Japanese authorities in currency markets. LSEG data shows the yen has strengthened by approximately 6% against the dollar, making it the best-performing G10 currency in this period [8]. Speculators have shifted from net short to net long positions on the yen, with the Commodity Futures Trading Commission reporting around 10,800 net long contracts as of September 8, compared to 92,200 net short contracts the previous week [8]. Hawkish commentary from Bank of Japan board members, who have left open the possibility of accelerated rate hikes, has further supported the yen's strength, while US Treasury Secretary Scott Bessent warned speculators against betting on yen weakness [8].
This renewed strength has made the yen less attractive for carry trades, prompting traders to consider the Chinese yuan and Canadian dollar as alternative funding currencies. Bank of America’s Claudio Piron noted increased issuance in CNH (offshore yuan) bonds and multinational companies seeking funding in those markets, despite China keeping its benchmark lending rates unchanged for the 15th consecutive month (one-year loan prime rate at 3%, five-year at 3.5%) [8]. TD Securities highlighted that the Canadian dollar’s carry-to-volatility ratio is now comparable to the yen, and while the CAD weakened after recent US-Canada tariff escalations, it remains a candidate for carry trade funding [8]. The Bank of Canada held its policy rate steady at 2.25% earlier this month [8][4].
Canadian inflation data is in focus, with headline CPI expected to remain at 3.0% year-on-year and core measures projected around 2% [2][4]. Analysts suggest that a core inflation reading above 2% would reinforce the case for a 25 basis point BoC rate hike to 2.50% on October 28, supporting the CAD, while a reading at or below 2% could prompt dovish repricing [2]. Market participants expect nearly 36 basis points of tightening by year-end, and elevated oil prices and tariff tensions are seen as factors sustaining inflationary pressures [4].
Meanwhile, the US Dollar Index (DXY) has shown resilience, trading near 99.1–99.46, supported by firmer US CPI data and a near-90% probability of a September Fed hike [1][5][6]. However, despite positive US macro surprises and rising yields, the dollar’s upside has been capped, with stretched long-dollar positioning and improving risk sentiment limiting further gains [1]. Analysts at MUFG/BTMU report that the market is pricing a terminal Fed rate in 2027 of 4.53%, up from 4.29% last week [5].
In currency markets, the NZD/USD pair has dropped to its lowest level since July 29, around 0.5780, as the US dollar gains on Fed rate hike bets and the Reserve Bank of New Zealand maintains a dovish outlook [3][6]. The New Zealand services sector expanded for a third consecutive month, with the PSI at 51.2 in August, but the recovery remains fragile [6]. The USD was the strongest against the NZD in today’s trading, with a 0.58% gain [5].
UOB strategist Quek Ser Leang notes that while the USD/JPY bias is tilted lower, downward momentum is slowing and the odds of revisiting the 152.08 low are diminishing. A break above 154.90 would signal stabilization [7]. OCBC’s Christopher Wong emphasizes that Fed guidance will be key for the next leg of dollar moves, as recent price action shows diminishing returns for the USD from positive macro surprises [1][8].
CONCLUSION
The yen’s appreciation has reshaped carry trade dynamics, with the Canadian dollar and Chinese yuan emerging as alternatives amid shifting central bank policies and market volatility. While the US dollar remains supported by hawkish Fed expectations, its upside is increasingly capped. Canadian inflation data and central bank guidance will be pivotal for further market direction, as traders adjust to evolving global currency trends.