After a rocky Wednesday, financial markets stabilised on Thursday as trade war fears eased. Asian moved back up with the Nikkei rising 1.17%, while Chinese equities rebounded strongly with the Shanghai and Shenzhen Composites rising 2.17% and 2.73% respectively. Similarly, European stocks opened slightly higher with the Euro Stoxx 50 up 0.09% and the German DAX rising 0.27%.
In the FX market, the greenback enjoyed a nice recovery as investors fled risky assets. The dollar index surged to 94.78 (its high level since July 3rd) but consolidated gains on Thursday morning. Surprisingly, the Japanese yen, which usually appreciates during period of rising risk aversion, fell substantially over the last 24 hours. USD/JPY rose more 1.30% to 112.42, its highest level since January 10th. The currency pair is currently testing a key resistance level, which corresponds to the top of its multi-month downtrend channel.
It is still why the market has punished the yen against the backdrop of deteriorating risk environment. However, the surge in demand for upside protection in USD/JPY suggests that investors are getting anxious about further yen weakness. Indeed, call prices for all maturity increased with the 1-week 25-delta risk reversal measure climbing to -0.34% from -1.28% two weeks ago.
Today, traders will focus on the publication of the June inflation report in the US. Headline inflation is expected to have risen 2.9%y/y in June, while the core gauge, which excludes the most volatile components such as energy and food prices, should come in at 2.3%y/y. A stronger print in core inflation should provide the last nudge needed for USD/JPY to break the resistance as it would support the case for more rate hikes this year.
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