JGBS: Slightly Cheaper At Lunch

The JPY has collapsed across the board on the election outcome, unless there is pushback from the government the market will be running with the theme of a looser policy. This together with a BOJ that is probably unlikely to hike at its next meeting could see the carry trade come to the fore again as risk continues to move higher. The last CFTC data available showed Asset Managers remained significantly long JPY, should these moves begin to gather momentum, they could be forced to first pare back their longs and then if significant levels are broken begin to rebuild JPY shorts. Many crosses are breaking through some pivotal areas(CNH/JPY Above 21.00) and unless the government says something to contradict the markets thinking these could begin to gather momentum.

• EUR/JPY - Overnight range 174.91 - 176.14, Asia is trading around 176.00. The pair surged through 175.00 and made new highs breaking those from 2024, it is currently consolidating those gains around the 176.00 area. Dips should now be supported as the move higher looks to build momentum.
• GBP/JPY - Overnight 201.25 - 202.82, Asia trades around 202.70. This pair has finally found the momentum to accelerate above the 200.00 area. This should signal that this move could potentially trend higher from here, dips should now be supported with the focus turning toward the 2024 highs just below 208.
• NZD/JPY - Overnight range 87.26 - 87.85, Asia is currently dealing 87.75. This pair which was the best way to play a long JPY in the crosses has taken the most pain as these positions are challenged. The price action does not look great and a move back above 88.00/88.50 will see these positions challenged further. A move back above 89.50/90.00 is needed to turn the focus to potentially trending higher.
• CNH/JPY - Overnight range 20.9653 - 21.0561, Asia is currently trading around 21.0700.  The pair is breaking above the upper boundary of its recent 20.40-21.00 range, a sustained break back above the pivotal 21.00 area could signal the start of the next leg higher targeting the 21.50 area first and then 22.00.

Fig 1 : CNH/JPY Weekly Chart

Source: MNI - Market News/Bloomberg Finance L.P

China markets remain closed until Thursday for National Day celebrations, but we have seen Sep FX reserves figures print. The headline rose to $3338.66bn, from $3322.15bn in August. This is the highest levels for FX reserves since end 2015, see the chart below. At face value this supports the backdrop of generally improved capital flow/strong current account picture as 2025 has unfolded. The general sell-side consensus is for stronger yuan levels as we approach year end, which fits with this backdrop. The consensus via BBG is for USD/CNY hit 7.1000 by year end, then 7.08 by end Q1 next year. 

• China's gold holdings also ticked up. The Sep rise saw actual holdings up to 74.06m fine troy ounces, versus 74.02m in Aug. In nominal terms, holdings rose to $283.29bn, from $253.84bn, so valuation effects no doubt playing a role as gold continues to rally in spot terms.
• Central bank/reserve allocation to gold remains a well-established theme that is supporting the record high in gold prices. 

Fig 1: China FX Reserves Continue To Track Higher 

Source: Bloomberg Finance L.P./MNI 

The BBDXY range overnight was 1203.42 - 1207.79, Asia is currently trading around 1204, +0.05%. The USD got a welcome reprieve from the surge in USD/JPY, after failing to build any downward momentum below 1200 once more can the USD build on this? The USD has historically not done well during shutdowns, but tends to bounce back quite hard when they eventually end so the market will be waiting for any signs of a breakthrough. The 1215-1225 area remains tough resistance, only a close back above 1230 would start to get USD shorts to challenge their conviction.

• Bloomberg - “Dollar’s Haven Appeal Returns Amid Global Political Chaos. As France stumbles and Japan is seemingly doubling down on easy money, the dollar’s relative stability looks like a case for strength.”
• Barchart on X: "U.S. Dollar entering its strongest 2-month period of the year historically." 
• “Dollar to Retain Command as IMF Data Defies April Panic. What actually unfolded was less about dumping Treasuries and more about buying the “rest of the world.” IMF COFER data, which shows the composition of central bank reserves, confirms that there was no abrupt selling of dollars in the second quarter. In fact, official USD reserves rose in absolute terms following the April tariff shock.” - BBG

Fig 1: BBDXY Daily Chart

Source: MNI - Market News/Bloomberg Finance L.P