(23 OCTOBER 2017)DAILY MARKET BRIEF 2:Abe win give USD/JPY a boost

In Japan Prime Ministers Shinzo Abe ruling LDP-Komeito coalition was handed a resounding victory in the Lower House elections. Upstart opposition Party of Hope failed to converted general popularity into votes but did end up splitting the opposition vote making its easer for Abe to obtain a 2/3 majority. Despite the fact that Abenomics does have much room to debase the JPY, USDJPY rallied to 114.10 result on the removal of political uncertainty. Looking forward Prime Minister Abe will run again for the LDP leadership next year while the BoJ will be dominated by dovish members as BoJ governor and deputy governor’s selection next April will be under Abe strong control. Moving forward the fate of USDJPY depends less on BoJ policy and more the outlook for the Fed.

Growing expectations for a positive turn in US data has added to higher US interest rates. In addition, positive developments over a tax reform and continuity in naming the next Fed chairperson should keep USD firm against the JPY. Finally Japanese’s institutional investors knowing lower interest rates and YCC are unlikely to changes will further search overseas of yields. FX Asia is looking increasingly balanced with higher US yields on one side and solid global growth (expected around 3.0% 2017) and trade data on the other. We suspect that the risk is skewed towards USD upside. US data momentum is expected to reverse softness starting with 3Q GDP and PCE this week. However, given the recent strength of upside surprises in export momentum we anticipate cyclical softening which will send Asia FX lower.

By Peter Rosenstreich