(Bloomberg) -- The yen slid more than 1% versus the dollar while Japanese stocks rallied as early results of US presidential elections led some traders to wager that Donald Trump has an edge over Kamala Harris.
Investors see the yen as likely to extend declines on a Trump victory because his economic policy is seen as more expansionary and inflationary, making it less likely for the Federal Reserve to aggressively cut interest rates.
They see it gaining against the greenback if Harris wins, with her stance making it easier for the central bank to keep cutting rates.
Japanese markets are in particular focus as votes are counted in the US, given their size and liquidity, and the heavy focus on the dollar-yen currency pair during Asian trading hours.
“The markets are starting to bet on a return of Trump,” said Yugo Tsuboi, chief strategist at Daiwa Securities. “His margin is wider than the forecast in Florida, a populous state, raising expectations that the Republicans may be doing better elsewhere.”
The yen weakened 1.1% to 153.22 per dollar in Tokyo, paring back its advance for the past two days. Japanese shares prices rose, with the tech-heavy Nikkei gaining 2% and the broader Topix index up 1.7%, with gains seen in financials and chip-related stocks.
Japanese 10-year government bond futures are down 7 ticks while the benchmark cash debt yield was unchanged at 0.935%.
Traders are on guard for what could be one of the largest swings in the Japanese currency pair this year. The implied volatility on the overnight dollar-yen option jumped to 36.5% in early trade, near a one-year peak of 39.1% hit during the Japanese stock market’s meltdown in early August.
Japanese shares have failed to climb back to record levels hit in July as the yen’s recovery from its nadir that month and rising borrowing costs weighed on sentiment. A 12% plunge in both the Topix and Nikkei indexes on Aug. 5 was a reminder that Japan’s recently high-flying stocks have a lot of room to fall if investor sentiment turns pessimistic.
BOJ Implications
The yen’s persistent slide in recent years has been fueling imported inflation, putting pressure on the central bank to raise borrowing costs and adding to the woes of Japan’s Liberal Democratic Party, which needs to forge a new coalition after losing a majority in the Lower House in an election last month.
Many economists expect the Bank of Japan to raise interest rates as early as December.
The US election results add to market volatility facing Japanese investors who are trying to adjust to the end of the BOJ’s super-easy monetary policy.
The ruling coalition’s loss of its majority led to sharp swings in domestic asset prices. Uncertainties about the coalition’s fate are also making investors cautious about betting on further BOJ rate hikes.
A pause in rate increases may reassure global investors who are concerned about the possibility that Japanese asset owners might bring their cash home if returns improve.
--With assistance from Momoka Yokoyama and Winnie Hsu.
(Updates market moves and adds strategist quote)
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