MUFG: The JPY

The USD/JPY opened the week at 157.68 and struggled to break above 158 ahead of the US midterm elections. From European trading on 3 November, strong US economic data added to dollar buying and yen selling, pushing the pair to a weekly high of 158.76. The vote count progressed during Tokyo trading on 4 November, and dollar selling intensified as Democrats secured majorities in both the House and Senate, briefly sending the USD/JPY to below 157.50. The pair then rebounded to around 158.50 after President Donald Trump accepted the election result and signaled a willingness to work with Democrats.

The USD/JPY subsequently traded below 158.50 before coming under renewed pressure on 5 November as a sharp selloff in US equities, led by semiconductor stocks, triggered renewed dollar selling and yen buying, pushing the pair back below 157.50. At the time of writing on 6 November, the USD/JPY was trading above 157.50 (Figure 1). Among G10 currencies, the Swiss franc was strong this week, while commodity-linked currencies such as the Australian dollar and Norwegian krone underperformed, reflecting the risk-off tone in financial markets (Figure 2).

In Japan, lhe BOJ will release its Summary of Opinions from the October Monetary Policy Meeting on 10 November, while Policy Board Member Toichiro Asada is due to speak at a meeting with local leaders on 12 November. The recent equity selloff has already prompted some market participants to question whether lhe BOJ will raise rates in December, with market pricing for a hike falling to around 50%. The Summary of Opinions is likely to contain a number of relatively hawkish views pointing toward another rate hike, given that the October meeting concluded that underlying inflation had reached a level broadly consistent with the 2% price stability target.

However, the current market environment brings to mind Deputy Governor Shinichi Uchida's August 2024 comment that the BOJ would not raise rates while financial and capital markets were unstable. The Summary of Opinions alone is therefore unlikely to revive expectations for a December hike. Asada's remarks could have a greater impact. He does not oppose the assessment that underlying inflation is now broadly consistent with the 2% target, nor the BOJ's basic policy of gradually adjusting the degree of monetary accommodation.

However, he opposed the September rate hike on the grounds that economic conditions “could not necessarily be said to be strong.“ Asada, who identifies with the reflationist camp, could reinforce the growing view that the BOJ may hold rates again in December. That would likely increase yen selling pressure against the dollar. The US stance against further yen weakness is unlikely to change materially after the midterm elections. The current environment therefore offers little incentive to take on fresh short-yen risk.

We continue to think the USD/JPY will struggle to break above its recent highs above 158.50.