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Momentum fizzles on recent JPY and USD moves.
John J. Hardy
Global Head of Macro Strategy
Summary: The Japanese yen sell-off has been slowly unwinding amidst political uncertainty, while the USD rally has quickly run into resistance as US treasury yields remain near recent lows.
The momentum in recent USD, JPY and even Euro moves has fizzled.
The rise of Sanae Takaichi as LDP’s new leader may not lead to her becoming Japan’s first female prime minister as the opposition DPP party leader Yuichiro Tamaki may be able to cobble together a ruling coalition that can entirely sideline the LDP for now. Given the needed compromises for any such coalition government to rule, the potential policy impulse is more muted, and therefore the theoretical risks of vastly larger deficits, etc. Japanse government bonds have rallied in response to this development, taking the JPY higher as well. For this to become more technically significant, however, USDJPY would need to slice back down all the way through the key 151.00-150.00 range as discussed in the chart below.
The rally in the Japanese yen helped push back against the broad US dollar resurgence, with Fed Chair Powell doing his part yesterday to soften the recent USD strength in claiming that the US labor market is weakening. US treasury yields are right on their multi-month, post-April “Liberation Day” lows, with the market pricing almost 100% odds of a 25-bp rate reduction at both the October and December FOMC meetings. This is an additional factor favoring a USDJPY retreat.
In Europe, the single currency has been buoyed by a strong rally in French sovereign debt as Macron yesterday suspended his own pension reforms until after the 2027 presidential election, a condition the Socialist Party required before voicing that it would not vote to topple a newly re-assembled government under Lecornu. Lost is the sense that France will ever meaningfully reduce deficits, but gained is political stability for the near term. Germany-France sovereign 10-year yield spreads dropped five basis points yesterday to a five-week low below 79 basis points but have rebounded slightly today.
Chart: USDJPY weekly Ichimoku
The USDJPY rally has come to a screeching halt this week as the LDP and Takaichi’s possibly bold platform may be shunted aside by an opposition coalition led by the DPP, as noted above. The firming of the JGB market and the JPY now have USDJPY pushing on the top of the key support zone for this recent rally move – one that extends from 151.00 all the way to 150.00. For Ichimoku technicals, the stakes are high here as the recent price action has just punched back up through the cloud – setting in motion a theoretical new uptrend and underlining that bears need an immediate reversal back into the sub-150.00 area to suggest that this uptrend attempt will fail.
Looking ahead – Fed Beige Book, US-China trade war risks, earnings season and US government shutdown
Currency traders are still dealing with the frustration of a lack of government data due to the shutdown, which is likely to at least extend until next week if the Democrats are hoping to get some political momentum from this Saturday’s “No Kings” protests. Betting site Kalshi.com has the odds of the shutdown extending beyond 30 days at 64%. Despite the shutdown, we will get a Fed Beige Book tonight after a relatively downbeat prior beige book. It will take some rather pointed observations from the Fed to push yields lower still – we probably need some government data for that.
Otherwise, the chief drivers here are US and Chinese trade policy and earnings season, which hits full tilt over the next couple of weeks. On trade issues, it’s about whether the US-China trade war risks escalate into the November 1 deadline, when the new 100% tariffs Trump has threatened would theoretically go into effect. A failure to agree on de-escalation could hit the US dollar and Australian dollar and sterling (the latter two on risk sentiment), while possibly boosting the JPY and EUR.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
The JPY is the center of attention as the overall negative trend contrasts with the sharp turnaround in momentum over the last week – let’s see if the bears can hold on here – otherwise, quite the reversal if we punch another 1% or so higher in the JPY within the G7 currencies. The precious metals readings suggest we are in a parabolic move that could end in a blow off top and reversal, if that isn’t what we are already seeing now.
Table: NEW FX Board Trend Scoreboard for individual pairs.
The euro is trying to recover in places – already on the cusp of trying to reverse the down-trend attempt in EURAUD, while EURUSD has some more lifting to do dig itself out of the modest recent downtrend, one that hasn’t developed momentum after the break down through 1.1650. JPY pairs went too far recently to look for downtrends just yet, but the first candidates might be AUDJPY and GBPJPY if the JPY continues higher. Elsewhere, NOK suffering on the crude oil weakness – let’s see if the move above EURNOK 11.75 can hold (the chart is not particularly compelling for this rally yet) while EURSEK needs to hurry up and get back below 11.00 if its recent downtrend is to survive.
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