Morning Bid: Yen at work

On Monday and Tuesday, global markets experienced a brief disturbance as Japan's yen surged to its strongest levels since February. This sudden rise in the currency seemed to be more about repositioning ahead of a likely Bank of Japan interest rate increase the following week. The BOJ's interest rate hike was supported by revised GDP estimates for Japan's second quarter and the largest year-over-year increase in real wages in five years in July.

Speculation has circulated that the BOJ might consider a more substantial rate increase than the usual 25 basis points, although this remains a controversial viewpoint.

The yen, alongside China's yuan and South Korea's won, is gaining considerable strength against the dollar. Market participants may become slightly apprehensive about the potential repercussions of unwinding yen-funded carry trades across global markets. Japan's Nikkei stock index dropped nearly 2% on Tuesday. Regardless, the overall economic outlook remains robust.

The euro zone's second-quarter GDP was also revised upward this week, along with strong U.S. employment data for August. These factors bolster the case for additional interest rate hikes this month, potentially even at the Federal Reserve.

The rise in oil prices back towards $100 per barrel, following Iran's announcement of economic warfare against the U.S. and the Houthis' attack on energy facilities in Saudi Arabia, further adds to the market's tension. Stocks have generally followed a positive growth narrative, as has copper, an indicator of global growth. However, the relationship between strong growth and rising interest rates to prevent overheating and uncontrolled stock market gains is a complex issue.

As Wall Street resumes trading after the Labor Day holiday, most stock indices are down before the market opens.

China's exports grew by 25% year-on-year in August, bolstering both its global trade surplus and its surplus with the U.S. Canada implemented retaliatory tariffs on U.S. goods on Tuesday, intensifying the trade war between the two countries. Despite trade tensions, China's trade surplus with the U.S. reached $29 billion, with exports to the U.S. increasing by 34% year-on-year.

The U.S. NFIB small business survey for August showed positive sentiment. For more details on the yen's rise, Iran's threat of economic warfare against the U.S., and other market-related news, check out the latest column on President Trump's views on interest rates and trade, and listen to the Morning Bid daily podcast.