Yen Slumps on Leadership Shift as Euro Falls After French PM Resigns
On Monday, political developments significantly influenced currency markets, with the Japanese yen experiencing its largest decline against the dollar in five months, as Sanae Takaichi appeared poised to become Japan’s next prime minister. Meanwhile, the euro fell following the announcement of the resignation of France’s new prime minister. Takaichi, a former economic security and internal affairs minister, has an expansionary fiscal agenda for the world’s fourth-largest economy and secured victory in the ruling Liberal Democratic Party’s leadership election over the weekend.
Her victory led traders to lower their expectations regarding a potential interest rate hike by the Bank of Japan this month and to reevaluate their perspective on the yen’s trajectory. The dollar increased by 1.8 percent to reach 150.1 yen, marking its highest level since August. If maintained, that would mark its largest daily increase since May 12. In Asian trade, the euro reached 176.22 yen, marking its highest point ever against the yen, though it later reduced those gains to an increase of 1.2 percent at 175.3 yen. Deutsche Bank had advised clients to position for yen appreciation, but they “are now getting out following the LDP election outcome this weekend,” stated George Saravelos. “Sanae Takaichi’s unexpected win brings a significant amount of uncertainty regarding Japan’s policy priorities and the timing of the BoJ’s interest rate hike cycle.”
Long-dated Japanese government bonds experienced a sell-off, as the yield on the 40-year JGB surged by 15.2 basis points to reach 3.538 per cent. The yen swaps market on Monday reflects a 41 per cent probability of a rate hike by December, a decrease from 68 per cent observed on Friday. Meanwhile, the euro declined following the resignation of France’s new prime minister, Sebastien Lecornu, exacerbating the political challenges in debt-laden France. The euro fell 0.7 per cent to $1.16635 and decreased 0.3 per cent against the pound, reaching its lowest level in nearly a month. Sterling experienced a decline of 0.2 per cent against the dollar, trading at $1.3445.
This week, traders will face the challenge of navigating the absence of crucial US economic data amid the ongoing government shutdown. That could complicate the current market pricing, indicating that easing at the Fed’s October meeting is a near-certainty. According to the reports, Fed funds futures indicated a 96.7 percent probability of a 25-basis-point rate cut. “The lack of US data also leaves scope for markets to react more than they normally would to other inputs such as remarks from policymakers,” said Francesco Pesole, currency analyst.
