Profit-taking may emerge ahead of the weekend, following the DXY Index’s near-2% surge to 99.5 in the first four days of this week. The USD’s recovery, driven by political shifts in Japan and France overshadowing US government shutdown risks, has started to temper.
The JPY sell-off following Sanae Takaichi’s victory at the Liberal Democratic Party (LDP) election may lose steam. The Diet’s vote to confirm Japan’s first female prime minister to at least October 20 from October 15 has cast doubts on her “Abenomic-style” policies that drove USD/JPY up by 3.8% to 153 this week. Komeito, the LDP’s long-time coalition partner, has misgivings about Takaichi courting support from opposition parties for her policies. Takaichi has also started downplaying the JPY’s weakness to avoid drawing scrutiny from the Trump administration, which is sensitive to perceived currency manipulation. The OIS market has increased the odds of a Bank of Japan rate hike at the December 19 meeting to 37% from 17.5% last Friday. The market reckons that the JPY’s weakness would add to the cost-of-living issue that cost the LDP its majority in both houses of parliament.
The political risk premium against the EUR may pause. Caretaker French Prime Minister Sebastien Lecornu told reporters yesterday that President Emmanuel Macron could nominate a new premier in the next 48 hours. He also said that political parties might be willing to have a budget for France before the end of 2025. If so, this could stymie calls from the opposition parties for Macron’s resignation and new elections. Meanwhile, the Bank of France sought to shore up sentiment, indicating that economic growth was likely resilient at 0.3% in 3Q25, unaffected by the political uncertainty. With the DXY Index near the pivotal 100 level, we are monitoring for signs of discomfort at the Trump administration about the EUR/USD’s weakness around 1.15, complicating the American trade agenda. US President Donald Trump also appears to view Macron as a key interlocuter in EU-level Ukraine diplomacy and as a diplomatic bridge between strategic actors, including the US and Russia.
New York Fed President John Williams said that US data lapses from the US government shutdown would not deter the Fed from action. The futures maintained a more-than-90% chance of another 25-bps rate cut to 3.75-4.00% at the October 29 FOMC. Williams is paying more attention to the risk of a further labour market slowdown, which he sees limiting inflation. Williams was less worried about inflation today than earlier in the year. Although the New York Fed’s 1-year inflation expectations gauge rose to a five-month high of 3.4% in September, those for 3- and 5-year were capped at 3%. Williams saw room for rates to fall back to a neutral setting; he previously estimated the inflation-adjusted neutral rate at 0.75%.
Assuming the shutdown drags on next week, US military personnel, IRS staff, and other federal workers could miss their mid-October pay checks, affecting consumer spending and sentiment. Markets should pay more attention to the University of Michigan consumer survey today, especially on how the labour market worries are weighing on consumer confidence and capping inflation expectations.
Quote of the Day
“The economist John Maynard Keynes said that in the long run, we are all dead. If he were around today, he might say that, in the long run, we are all on Social Security and Medicare.”
Ben Bernanke
October 10 in history
The Nobel Prize in Economics was awarded to Ben Bernanke, Douglas Diamond, and Philip Dybvig in 2022.
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