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The election of the Liberal Democratic Party of Japan may trigger a policy shift, and the risk of the upward trend of the US-Japan exchange rate is underestimated!
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Hello everyone, today XM Foreign Exchange will bring you "[XM Foreign Exchange]: The election of the Japanese Liberal Democratic Party may trigger a policy shift, and the upward risk of the US-Japan exchange rate is underestimated!". Hope it will be helpful to you! The original content is as follows:
Asian market market
On Wednesday, the US dollar index continued to rise during the day and once approached the $98 mark, but failed to break here. As of now, the US dollar price is 97.77.
U.S. Treasury Secretary Bescent: The Federal Reserve interest rate has been too high for too long; we will enter a loose cycle. Powell was supposed to signal a rate cut of 100 to 150 basis points. OMC's vote xn--xm-6d1dw86k.committee and Chicago Fed Chairman Goulsby warned against a series of interest rate cuts this year, saying that he is still worried about inflation and is unwilling to support interest rate cuts in the next meeting; San Francisco Fed Chairman Daley believes that economic growth, labor, etc. slow down, and inflation is lower than expected, and further interest rate cuts may be cuts.
The United States publishes official documents on its tariff agreement with the EU. The United States has officially lowered tariffs on EU automobiles to 15%, effective from August 1, 2025.
The United States initiates a 232-section investigation into imported medical devices, industrial machinery, etc.
It is rumored that Trump plans to visit Japan before attending South Korea's APEC next month, and may meet with the new Japanese prime minister for the first time.
Brazilian President Lula: I think when I meet with Trump, all tariff issues will be solved.
Polish Prime Minister Tusk said that the border port with Belarus will be reopened in the early morning of the 25th.
Trump canceled a meeting plan with the Democratic Party regarding temporary appropriations bills, saying the meeting could not be fruitful.
Source:As a result, Iran has not made any progress in negotiations with European countries by September 27, which will restore UN sanctions on Iran.
The Trump administration proposed a new H-1B visa process, which is more conducive to highly skilled and high-paying workers; after the H-1B visa dispute, India sought personnel access in trade negotiations with the United States.
Indonesia and the EU are about to sign a free trade agreement, and 80% of exported goods will enjoy zero tariffs.
OECD: Global economic growth is expected to be 3.2% in 2025 (previously forecasted at 2.9%) and 2.9% in 2026 (consistent with previous forecasts).
Summary of institutional views
Nomura Securities: The October storm of the United States and Japan is xn--xm-6d1dw86k.coming soon! The risk of depreciation of the yen is temporarily limited
The market did not fluctuate before and after the Fed meeting in September, which seemed to prompt the partial closing of the US and Japanese short positions established before the meeting. Even so, volatility in the United States and Japan may significantly intensify in early October, with a series of events that may affect the market: ① Important Japanese data; ② Liberal Democratic Party leadership elections; ③ Major US economic data. If the developments lead to an increase in the likelihood of the Bank of Japan raising interest rates in October or the Federal Reserve's 50 basis points cut in October, it may put downward pressure on the United States and Japan.
Specifically, Japan's Liberal Democratic Party elections should focus on candidates' measures to deal with high inflation. To date, candidates have shown little to dove’s macroeconomic policy stance. Political uncertainty and concerns about fiscal easing may persist ahead of the 4 October Liberal Democratic Party elections, but macroeconomic policies are unlikely to turn sharply to a more dovish stance. Five candidates, Hakoshi Hachishi, are cautious about the reduction of consumption tax; Koizumi Shinjiro prioritizes inflation measures and may tolerate gradual interest rate hikes; while Japanese cabinet chief Lin Fangmasato said that he would continue the Bank of Japan's policy. We believe that the risk of continued depreciation of the yen driven by the development of the domestic political situation is limited.
However, if Koizumi's advantage is consolidated, the market's perception that the risk of depreciation of the yen is fading may be strengthened. If Shinjiro Koizumi or Yoshiro Lin are becoming Japanese Prime Ministers, expectations for a BOJ rate hike could increase upward pressure on the yen before the Bank of Japan meeting in October.
Fanong Credit: The inflation deadlock is difficult to break, and the PCE data will lock in the Fed's "hands and feet" again
We expect US PCE inflation to be lower than CPI data in August. We still believe that the inflation situation in recent months is not optimistic. Core PCE is expected to grow by about 0.22%-0.23% month-on-month, while core CPI is about 0.35% month-on-month. Despite this, the year-on-year growth rate will remain at 2.9%. As for overall PCE, we predict monthly growth of about 0.25%, rounded to 0.3%, and year-on-year growth rate slightly increased from 2.6% to 2.7%. If our forecast is accurate, the core inflation rate will be on par with February year-on-year, indicating that inflation has increased this year despite the relatively limited impact of tariffs so far, despite the relatively limited impact of tariffs so farIt has basically stagnated. Therefore, we still believe that sticky inflation may lead to inflation ultimately gaining the upper hand in the Fed's policy objectives and limit the total amount of easing the Fed implemented (compared to the current market price).
Deutsche Bank: The yen bulls will wake up strongly, and the United States and Japan will eventually fall below 140
We hold a bullish view on the yen at the end of the year and expect it to play a greater role in driving the dollar to weaken. Inflation in Japan has been high for a long time, but we believe that the political urgency of policy response has changed. There was a two-vote interest rate hike in the Bank of Japan meeting in September worth paying attention to the issue - historical data shows that such objections often follow the rate hike action after such objections. The Bank of Japan is expected to restart its tightening cycle, and xn--xm-6d1dw86k.combined with the Federal Reserve's interest rate cuts, it will jointly promote the flow of funds supporting the yen.
As hedging costs fall, Japanese investors may increase the hedging ratio of US dollar assets and increase their allocation of Japanese government bonds. The starting point of the extremely undervalued yen has created broad room for its appreciation. It is expected that the US dollar will fall below the 140 mark this year, and it is also optimistic about shorting the pound against the yen. The main risk of bullish yen is that if the Liberal Democratic Party elects dovish leaders, it will push Japan to further move towards a fiscal-dominated model. In this tail scenario, the yen may weaken sharply due to overheating inflation in the economy.
Fanong Credit: The three factions are fighting to set the tone of the yen, and the radicals in the fiscal field account for half?
The election of the presidential election of the Liberal Democratic Party of Japan is at an important moment. In addition to geopolitical risks, the Liberal Democratic Party also faces challenges from the conservative opposition party, and needs to regain support from conservatives and younger generations by changing policies, getting rid of neoliberal austerity policies, and turning to more active fiscal policies. The final winner will determine the extent of this transition. Three main candidates from different factions of the Liberal Democratic Party represent different views:
1. Conservatives: Takashi Saemi will represent the most radical change, advocating the adoption of active fiscal policies and loose monetary policies, and permanently get rid of deflation in a "high-pressure economy" way. We believe that the probability of high-city winning elections is 50%.
2. Centre: Koizumiro advocates adopting more moderate fiscal policies, structural reforms and monetary policy normalization. We expect Koizumi to win the election to be 35%.
3. Liberal Party: Lin Fangzheng will maintain the current situation of fiscal rectification, xn--xm-6d1dw86k.comprehensive tax system and social security reform and monetary policy normalization set by former Prime Minister Shigeru Ishiba. We believe that Lin Fangzheng's probability of winning is only 15%.
Our model shows that Takashi Hayak's victory will have the most favorable impact on the United States and Japan, bringing it to 155 in the next year. Koizumiro's victory in the election will also have good news for the United States and Japan, but the positive news is relatively small, pushing the exchange rate to 150. Lin Fangzheng's victory in the election will have a negative impact on the United States and Japan, causing him to fall to 140 in the next year. In addition, our simulated probability weighted average results show that the United States and Japan will reach 151 in one year, while the United States and Japan will reach 148 by the end of 2026, which indicates that the market may underestimate the U.S. and Japan's prevailing before and after the Liberal Democratic Party election.Take risks.
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