(Bloomberg) -- The yen fell as the market’s shock subsided over Shigeru Ishiba’s victory in the leadership race of the ruling Liberal Democratic Party.
Japan’s currency dropped as much as 0.5% to 142.95 yen per dollar, following its surge of as much as 1.9% on Friday in the wake of Ishiba’s unexpected win over dovish opponent Sanae Takaichi. The Nikkei 225 Stock Average got its first chance to react to the result, sliding 4.7%.
The market is now pricing in Ishiba’s comments over the weekend that the current trajectory of the Bank of Japan’s monetary easing must continue.
“The moves were strong because the market had factored in a win from Takaichi,” said Yukio Ishizuki, a senior currency strategist at Daiwa Securities Co. in Tokyo. “But Ishiba’s comments over the weekend were trying to put out the fire of his hawkish image.”
Ishiba may call for a general election on Oct. 27, according to NHK. Kyodo News reported that Katsunobu Kato, a former health minister who advocates for Abenomics, is set to become the next finance minister.
“Ishiba’s stance on monetary policy is thought to be the same as the Kishida administration, which generally respects the independence of the BOJ, and he is not actively in favor of raising interest rates,” wrote Mizuho Securities strategists Masafumi Yamamoto and Masayoshi Mihara in a note. “So the scope for the yen to continue to appreciate in the lead-up to the formation of the new cabinet is likely to be limited.”
Traders will keep an eye on US employment data coming out at the end of the week to see if it supports the market’s view that the Federal Reserve will cut interest rates by 75 basis points this year. If it doesn’t, then the dollar may strengthen versus the yen.
The market’s bias toward dollar-yen moving lower is fading slightly, with the premium to hedge the downside of the cross over the next month, compared with its upside, remaining below Friday’s high of 1.27%.
“Skew is also rather stable, which indicates that there is not a lot of additional downside demand just yet,” said Nathan Swami, Singapore based head of FX trading for Asia Pacific at Citigroup Inc.
--With assistance from Masahiro Hidaka.
©2024 Bloomberg L.P.
