JPY Weekly Topics - 22 October 2024
- Oct 22, 2024
USD/JPY up over 10 yen in just over a month
The USD/JPY rose above 150 for the first time since 1 August, around two and a half months ago. It has been just over a month since it declined to the 139 level on 16 September. Changes in domestic and external conditions over that time have resulted in a weaker yen and stronger dollar. The USD/JPY has continued to recover following the sharp decline from the start of July.
Expectations for domestic and overseas monetary policy and the US presidential election
Turning first to Japan, Prime Minister Shigeru Ishiba's comments are still having an impact. After meeting with BOJ Governor Ueda on 2 October, Ishiba said "I do not believe that we are in an environment that would require us to raise interest rates further." The USD/JPY rose by almost three yen on that day, from the 143 to the 146 level, and did not shed the gains despite efforts by the authorities to undo the damage.
Next, in the US, expectations for a rapid pace of rate cuts are fading. The FOMC decided to cut interest rates by 50bp in September, but Fed Chair Jay Powell said that this was not the default pace of cuts. In October, employment data and the CPI for September exceeded market expectations. The same was true for retail sales figures announced on 17 October, and this may have been the final blow. On 14 October, Fed Governor Chris Waller said the pace of rate cuts should be considered carefully, and that a pause could be considered if inflation resurfaces. Consequently, as of 17 October, the number of rate cuts priced in by FF futures has declined to about 1.7 times for the two remaining FOMC meetings this year (Figure 1).
We think the direction of the US presidential election is also encouraging the dollar to strengthen. Some polls in October started to show Trump overtaking Harris in the presidential race. Trump appears to be gaining support in battleground states, with some polling on 17 October suggesting a red sweep in which the Republicans would also win both the House and Senate elections. Growth in support for Trump is putting upward pressure on US interest rates, which appears to be pushing up the USD/JPY as well (Figure 2). The market seems to be already starting to factor in a Trump victory.
FIGURE 1: POLICY RATE IMPLIED BY FF FUTURES
Source: Bloomberg, MUFG
FIGURE 2: TRUMP'S CHANCE OF WINNING AND USD/JPY
Source: PREDICTIT, Bloomberg, MUFG