JPY: Spot Wedge With Simple Fair Value Re-Widens Ahead Of Election
The chart below plots our simple USD/JPY fair value estimate against spot USD/JPY (the darker blue line, which was last close to 157.00). As the Japan election comes into view, the wedge between the fair value estimate and spot USD/JPY has re-widened. The fair value estimate, which is written off the US-JP yr swap rate differential and global equities, has edged down recently (last just above 151.00). This reflects slightly lower US-JP swap rate differentials, along with some global equity market softness. Still, taking a step back, the fair value estimate hasn't shown a strong trend in recent months. The deviation between the fair value and spot is around 3.90%, wides in 2026 to date on this metric are around 4.8%.
- Opinion polls have trended in favour of Takaichi's LDP party. Via BBG: "One poll suggests Takaichi's LDP may achieve a two-thirds majority in the lower house election, which would allow it to override a veto in the upper house where it lacks a majority"
- Also via BBG, Goldman Sachs: "If the ruling Liberal Democratic Party wins an outright majority in the upcoming election, it should “raise market concerns about the potential path of spending plans, warranting renewed weakness in JGBs and the yen, unless the BOJ were to shift toward faster rate hikes,” according to Goldman Sachs.
- A push towards 160.00 in USD/JPY will raise intervention risks though. Without any change in the underlying fair value estimate, this would see the model error term approach close to 6%, which at the very least is likely to raise FX rhetoric from the authorities (around divergence form fundamentals etc).
Fig 1: USD/JPY Spot Versus Simple Fair Value
Source: Bloomberg Finance L.P./MNI
Want to read more?
Find more articles and bullets on these widgets:
Historical bullets
AUSSIE BONDS: Treading Water Ahead Of Tomorrow's November CPI Data
ACGBs (YM +1.0 & XM +2.0) are modestly stronger on a data-light session.
- Cash US tsys are ~1bp cheaper in today's Asia-Pac session after yesterday's modest gains.
- Cash ACGBs are 1-2bps richer with the AU-US 10-year yield differential at +61bps.
- The bills strip is slightly mixed across contracts.
- RBA-dated OIS pricing shows tightening across all meetings, with the probability of a 25bp hike rising from 36% for February to 97% by June and 160% by December 2026.
- The focus of this week will be tomorrow’s November CPI, which is the new complete monthly series. The new trimmed mean CPI appears less volatile than the incomplete series but printed 0.7pp higher at 2.8% y/y in June 2025, which was the recent trough. Q2 was at 2.7% y/y overall.
- Bloomberg consensus forecasts trimmed mean to be stable at 3.3% in November, which would be at or above the top of the RBA's 2-3% band for the fifth consecutive month. Headline is expected to moderate 0.2pp to 3.6% but this series continues to be distorted by previous government electricity rebates.
Bloomberg Finance LP
US TSYS: TYH6 Fails to Break Above Key Tech Level
US Treasury futures opened marginally softer Tuesday and remain there at lunch. The US 10-Yr future is down -01 at 112-12+. Having traded up overnight near to the 100-day EMA of 112-14+, TYH6 has moved lower again with its downside resistance below from the 200-day EMA is at 112.
Cash had had a strong rally overnight and is giving some of that back today in the Asia trading session. Yields are up +0.3bps to 1.0bps with the long end underperforming.
- The 2-Yr is at 3.457% up +0.4bps
- The 5-Yr is at 3.711% up +0.5bps
- The 10-Yr is at 4.169% up +0.6bps
- The 30-Yr is at 4.861% up 1.0bps
MNI INTERVIEW: Fed’s Miran Sees Substantial Rate Cuts In 2026 https://www.mnimarkets.com/articles/mni-interview-feds-miran-sees-substantial-rate-cuts-in-2026-1767647426336
Tonight the focus for the bond market will be a US$75bn 6-week bill auction.
AUSTRALIA: Consensus Expects November Inflation To Moderate
The new complete November CPI prints on Wednesday and is forecast to show some moderation but remain above 3%. While the quarterly data on 28 January will be the decisive input into the 3 February RBA decision, the new monthly headline and services have a very close fit with the previous monthly CPI series. However, the new trimmed mean will need some time for not only the seasonal adjustment factors to emerge but also the trend as there is currently very limited history.
- If trimmed mean inflation holds at 3.3% or rises further then the market may bring forward the rate hike priced in for June.
- The seasonally adjusted trimmed mean rose 0.3% m/m in October for the third consecutive month bringing the annual rate to 3.3%. 3-month annualised momentum stabilised at 3.8%. It is projected to moderate 0.1pp to 3.2% with forecasts ranging from 3.1% to 3.4%. CBA is in line with consensus while ANZ and NAB expect no change at 3.3%.
- The new trimmed mean CPI appears less volatile than the incomplete series but printed 0.7pp higher at 2.8% y/y in June 2025, which was the recent trough. Q2 was at 2.7% y/y overall.
- CPI ex volatile items & holiday travel is another measure of underlying inflation but has a very close fit with the previous monthly series. In October it rose 0.2pp to 4.0%, the highest in 18 months.
- Bloomberg consensus expects headline to moderate 0.2pp to 3.6% y/y in November with forecasts ranging from 3.6% to 3.9%. Westpac says that it will be impacted by a 16% rise in electricity prices. The series continues to be impacted by the timing of government electricity rebates.
- CBA and NAB are in line with consensus while ANZ is forecasting 3.7% and Westpac expects headline to be unchanged at 3.8%.
Australia CPI ex volatile items & holiday travel y/y%
Source: MNI - Market News/ABS
