Global Head of Macro Strategy
Summary: The Japanese yen was sent sharply lower on the surprise victory of Takaichi in the LDP leadership election, but the initial reaction may be misleading as the chief priority of any new administration will be to fight inflation, and a stronger JPY is the best medicine.
Takaichi surprise blasts JPY lower, but…
The betting sites and the markets got it all wrong in predicting the outcome of Japan’s LDP party election at the weekend, as Sanae Takaichi, the candidate labeled a monetary policy and fiscal policy dove, emerged as the victor after all after a crazy couple of weeks of her odds of winning first rising and then falling to their lowest late last week – just before she actually won. There is endless commentary out there on this very impressive politician, who as a woman in the male-dominated party is clearly a formidable figure to have risen to the top.
The initial blast lower in the JPY on the news of her victory is based chiefly on her having spoken against BoJ tightening in the past and in favour of more fiscal outlays for local governments and targeted tax cuts. Expanding deficits is a risky tactic, of course, when there has been pressure on bond markets – and that has put long-date JGB’s under pressure as a part of the market reaction here. Already, the longest JGB yields jumped overnight on the news, while short-dated JGB yields dropped slightly.
Yet, the market reaction to her victory may already be overdone as we must note that the chief priority for the LDP is to address what is far and away the number one priority among voters: high inflation. The best way to do so? With a stronger currency, particularly for a country that imports nearly everything. In addition, Takaichi’s fiscal focus is not so much on redistribution, but chiefly on supply-side stimulus for growth in investment in key new-tech industries and defense.
Given the Trump administration’s focus on a more competitive US dollar and lowering Fed rates, there is a marriage of convenience here with Japan’s future policy mix as well. USDJPY is more likely headed to 125 than to 175.
Whoops – there went another French government…
France and its politics are doing their best to tank the euro to start the week, as newly appointed Prime Minister Lecornu has just resigned this morning only a day after his cabinet was announced that got strong pushback from the National Assembly. Germany-France 10-year yield spreads have spiked as high as 89 basis points as of this writing, their highest since the Eurozone sovereign debt crisis aback in 2011-12. I don’t see a way out of the mess in France – with or without Macron calling new elections.
Chart: EURJPY
JPY crosses exploded on the news of Takaichi emerging victorious as the LDP’s new leader. EURJPY posted a strong new all time high since the introduction of the euro, clear of 176.00. Later, the pair saw some considerable back-tracking on the news of the latest French prime minister resigning even before he could really get started. As noted above, the weak JPY move may eventually prove misleading, but it would be remarkable if this latest move higher in EURJPY is reversed immediately on the first day after this weekend’s news. French political dysfunction could wear on the euro if the strain on French debt markets worsens here.
Looking ahead
The visibility for this market is be poor when we don’t know when key US data will be forthcoming, but in the meantime we’ll have to assess the timing of the shutdown ending – as noted previously, the odds of this extending much more than a month are very low as key workers, including the military won’t be paid as long as the government is shut down.
In Europe, the weaker euro on France’s political situation is pushing the euro lower versus the usual suspect the Swiss France, but also note the move in EURGBP and even EURNOK and EURSEK. The single currency looks vulnerable here.
Most of all, lets watch the technical developments in the JPY as well as the first policy signals that come out of the new Takaichi government that should be in place around mid-month.
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.
A further wild extension in the gold and silver trend signals – are these getting overbaked? Elsewhere, as noted, the negative JPY reading has suddenly re-intensified, while other signals are somewhat muted, save for a momentum shift to the positive for NZD and to the negative for the euro.
Table: NEW FX Board Trend Scoreboard for individual pairs. The EURUSD uptrend is faltering and will reverse today if we stick near here well below 1.1700. The freshly minted GBPJPY “downtrend” that never really got trending will flip back to a positive trend on the close today according to our indicator unless we get a spectacular sell-off later today.
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Global Head of Investment Strategy