US dollar backs up, JPY backs off as Takaichi makes history.

USDJPY bounce extends, low volatility remains.
USDJPY made a valiant try at a reversal down through the 150.00 level last week on the sudden bout of risk aversion triggered by fears of a re-escalation of the trade war between the US and China, when Trump threatened 100% tariffs after the November 1 deadline if China didn’t relent on rare earth export controls, purchases of US soybeans and the fentanyl issue. The JPY has since weakened again on the subsequent recovery in risk sentiment and more modest rebound in treasury yields. The rebound has been led by a few Trump statements meant to reassure markets as well as the assumption that the TACO (Trump Always Chickens Out) trade is the only viable option. We’ve got little coming from the Chinese side on developments in their position – so we remain a bit cautious. Either way, we’re in a critical phase of the trade talks between the US and China as we wind toward a supposed Trump-Xi meeting next Wednesday in South Korea and the supposed November 1 deadline. At this point, markets are expressing zero fear of any trade disruption, so the “surprise side” is skewed heavily toward an escalation of trade tensions.

Adding to the JPY weakness at the margin here is the vote overnight in Japan to make new LDP leader Sanae Takaichi the country’s first female prime minister. While she has strong convictions on her program, including stimulus to encourage investments and tax cuts, her coalition with the small Ishin party is a minority one, meaning that other parties in the lower house will have considerable leverage on an issue-by-issue governing cycle. She has appointed Satsuki Katayama as the next Finance Minister, apparently a nationalist and conservative who has said in an interview that the JPY’s real value is closer to 120-130 to the US dollar. I have a hard time believing in any significant USDJPY upside story from here and the backdrop of low US treasury yields already supports a much lower USDJPY rate. Still, we need to see the technical reversal and close back well south of 150.00 again for any encouragement that we are on the right track.

Elsewhere, the US dollar is broadly firmer after a fresh explosion of strong risk appetite yesterday, although many signs suggest a very unbalanced market, as popular shorts were squeezed and the WSJ notes that defensive sectors have led October’s gains. We’ll finally get some more impactful data from the US later this week despite the ongoing shutdown as the BLS will release the September CPI on Friday, giving the market something to trade.

Chart: EURGBP
EURGBP has been indecisive at the top of the longer term range around 0.8700 as the market weighs the relative negatives of the two currencies. In the UK, while the latest public sector borrowing data for September released this morning was reassuring (even if nearly as alarmingly large as expected), there is intense focus on the Starmer government’s fiscal plans for the coming year, with Chancellor Reeves set to announce the fall budget statement on November 26, one that is feared to bring capital gains and even property tax raises and some in a country where wealthier residents are leaving in droves and there is widespread discontent with the quality of public services. It screams 2026 recession risks, a dangerous dynamic for a country with twin deficits, especially if markets turn weaker elsewhere. As for Europe, the FT leads this morning with a big read on Germany’s Chancellor taking it way too slow with new spending and other plans and in France, Macron’s latest reappointment of Lecornu is proceeding, but we’ll face the ugly debate to put together a budget for next year well into December that could see the Germany-France yield spread elevated for the duration, and possibly taming the National Assembly to not overreach. I would normally have given the edge to the euro in this pair, but the market’s uncertainty is valid with such widespread malaise and uncertainty across Europe. Stay tuned and keep an open mind.