Momentum fizzles on recent JPY and USD moves.

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.