Yen Recovery After Leadership Contest

By Ankur Banerjee and Linda Pasquini
SINGAPORE/LONDON (Reuters)
The yen bounced on Friday, recovering earlier losses after Japan’s former defence minister Shigeru Ishiba won the leadership contest of the ruling Liberal Democratic Party, set to become the next prime minister.

Ishiba, a critic of past monetary stimulus, stated the central bank was “on the right policy track” with recent rate hikes. The yen gained about 1% to 143.44 yen per dollar after hitting a low of 146.49, its weakest since September 3.

Market expectations awaited a victory for hardliner Sanae Takaichi, a notable opponent of further interest rate hikes in a highly unpredictable leadership vote. Analysts at UBS remarked on the market surprise at Ishiba’s victory.

The yen rallied broadly, particularly against the euro, which fell 1.27% to 159.83. Marcel Thieliant, head of Asia-Pacific at Capital Economics, noted Ishiba had recently adopted a more cautious tone regarding national inflation recovery, interpreting his victory as a green light for further rate hikes.

However, Thieliant cautioned that the government’s influence on monetary policy might be less than perceived while indicating BOJ policymakers might feel relieved by Ishiba’s win.

In Europe, the euro decreased 0.45% at $1.1127 following reports indicating a slower-than-expected inflation rise in France and Spain. This fueled speculation of an October rate cut by the European Central Bank (ECB).

Jane Foley of Rabobank noted that the euro remained strong, still above $1.11, as traders awaited additional inflation data and pondered potential ECB rate cuts. An 80% chance of a cut was indicated in the derivatives market for next month’s meeting.

Meanwhile, China’s continuous stimulus measures have uplifted risk appetite, supporting stocks, commodities, and risk-sensitive currencies. Recent actions included lowering reserve requirements for banks and cutting key interest rates.

China’s leaders promised to enhance support for a struggling economy through significant interest rate cuts and adjustments to fiscal policies, raising expectations for more stimulus measures.

The British pound slightly dipped to $1.3367 but remained near a 2-1/2 year high, with the Australian and New Zealand dollars also maintaining their strength due to China’s stimulus plans.

Dollar Dynamics

Data released on Thursday suggested a stable U.S. labor market, alongside stronger-than-anticipated corporate profit growth in Q2. Nevertheless, the dollar stayed weak, with market estimates showing a predicted easing of 73 basis points for the rest of the year, including a 51% possibility of a further 50-bp cut.

After a recent 50-bp rate cut, the Federal Reserve appeared to be shifting focus from inflation concerns to labor market dynamics. The dollar index was last measured at 100.7, near Wednesday’s 14-month low of 100.21.

Investors will monitor the upcoming personal consumption expenditures price index, though analysts foresee little effect on U.S. rate expectations unless there is a substantial deviation in the data.