US Dollar Strengthening Against the Japanese Yen

The US dollar (USD) has been gaining strength in the Asian trading session, with the Japanese yen (JPY) being notably weak compared to other G10 currencies. The USD/JPY exchange rate has surged, reaching 152.38, marking a strong recovery after a dip seen in August. This rally is significant because it shows a reversal from the yen's temporary strength during a period when yen-backed carry trades were being unwound.

USDJPY H1 

• Yen-Backed Carry Trades: A strategy in which investors borrow low-yielding yen to invest in higher-yielding currencies or assets. When these trades are unwound, the yen temporarily strengthens as positions are reversed. This unwinding had occurred in August, but the yen has since weakened again.

The Role of Rising Global Bond Yields

A critical factor behind the yen’s weakness is the rise in global bond yields, particularly outside Japan. The US 10-year Treasury yield increased to 4.24%, up by 24 basis points from last week’s low, putting upward pressure on other global bond markets, including:

• German Bunds (10-year yield increased by 15 basis points)
• UK Gilts (10-year yield increased by 13 basis points)

The rising yields reflect increasing market expectations of inflation, driven by various factors such as economic policies, inflation fears, and commodity price shifts.

Impact of a Potential "Red Sweep" in the US Election

A significant driver behind the rise in bond yields is the increasing probability of a Donald Trump victory in the upcoming US election. Market analysts are now pricing in a 50% probability of a “Red Sweep,” up from 30% earlier in the month. A Red Sweep would mean Trump winning the presidency with Republican control of Congress.

• Inflationary Impact of Trump’s Policies: Trump’s policy platform includes measures that are perceived as inflationary:
  • Higher trade tariffs: These could lead to rising import prices, contributing to inflation.
  • Increased government spending: A likely focus on infrastructure could drive up government debt, boosting inflationary pressure.
  • Tighter immigration controls: This could reduce labour supply, potentially driving wages and inflation higher.

The possibility of these policies being enacted has led markets to expect higher inflation, further contributing to the rise in bond yields and strengthening the US dollar.

Rebound in Oil Prices and Inflation Expectations

Oil prices have also been rebounding, with the price per barrel rising from a low of USD 69 in early September. This surge in oil prices has further fuelled inflation expectations, as energy costs are a major component of consumer and producer prices. The US 10-year inflation breakeven rate has risen by 30 basis points, reflecting expectations that inflation will remain elevated.

West Texas Oil H1 

Outlook for the USD/JPY 

Given these developments, particularly the rising bond yields and a potential Red Sweep in the US election, I believe that the USD/JPY exchange rate could climb even higher. Some of my projections are looking the pair to trade the mid-to-high 150s range soon if these trends continue.

In summary, the interplay of rising global bond yields, higher oil prices, and potential US political shifts is driving both inflation expectations and the strengthening of the US dollar against the yen. This, in turn, is pushing the USD/JPY exchange rate to levels not seen in years, with further gains anticipated if the political and economic conditions persist.

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