US: Strong Election Day Performance Tempers Optimism Of Shutdown Resolution 1/2

Most but not all analysts seen by MNI tend to remain on the cautious side towards further material gains in USDJPY from current levels, while most larger volume options transactions in USDJPY have been skewed towards call structures with strikes in 151-155.00 region.

• Deutsche Bank: "We went long JPY in our FX Blueprint but are now getting out following the LDP election outcome this weekend. Sanae Takaichi’s surprise victory reintroduces too much uncertainty around Japan’s policy priorities and the timing of the BoJ hiking cycle. There is agreement that inflation is a problem in Japan, but uncertainty is now going up again on how it will be dealt with. […] Our base case is for near-term losses in the JPY towards 150 as the market adjusts to the surprise, but not material weakness beyond."
• Goldman Sachs: "Elevated two-way risk [after market open] as markets assess the likely policy path ahead. [...] expect only modest changes to the fiscal stance and no change to our modal path for the BoJ. This argues that much of the new fiscal risk premium should fade […] For some time, we have been making the case that global risk sentiment should be more important than domestic developments for the direction of the Yen, and that is still the case. However, it seems likely that domestic developments will add another headwind to Yen performance. We see upside risks to our USD/JPY forecasts and are closing our trade recommendation to go short USD/JPY (initiated at 147.69)."
• ING: "We don’t see much more upside room for USD/JPY from here. A much weaker yen stands to add to Japan’s cost of living concerns; the rally in USD/JPY could cause friction with Washington, and the yen may still be preferred should the US government shutdown last longer. Our base case is that this break above 150.0 is temporary, rather than the start of a more sustained rally in USD/JPY."
• JP Morgan: "Takaichi, who positions countermeasures against rising prices as her top economic policy priority, is not expected to welcome yen depreciation that accelerates domestic inflation further, and is unlikely to stand in the way of rate hikes to curb it. […] The long-standing view – that both the Japanese and US governments do not desire a significant rise in USD/JPY; if USD/JPY rises well above 150 yen, some form of policy response will cap further gains – remains unchanged."
• MUFG: "The combination of heightened fiscal risks in Japan and risk of delayed or even derailed BoJ rate hike plans will continue to encourage a weaker yen in the near-term unless evidence emerges that those initial policy expectations will not be realized. It may even open the door to a retest of the year to date highs for USD/JPY"
• SEB: "Is the JPY carry trade set for a comeback? The potential for a more dovish BoJ revives interest in the JPY carry trade as market volatility, especially at the short end, remains subdued. However, unlike before the August 2024 unwind, major central banks are now further into easing cycles. Although some emerging market currencies like BRL offer high carry, they entail much greater risk and volatility than G10 pairs. Thus, there may be some interest to reenter the yen carry trade, but the current setup remains less favorable than before."

• USDJPY consolidates above the 150.00 handle on elevated volumes (Z5 JPY futures have printed more than double their average volume for this time of day) as markets digest the unexpected victory for fiscal dove Takaichi at the LDP leadership contest, and the spillover impacts on reduced pricing for the BoJ's October meeting.
• From a technical perspective, the USDJPY breach of key short-term resistance at 149.96 paves the way for a test of the key medium-term resistance at 150.92, the Aug 1 high. A break of this hurdle would confirm a resumption of the bull leg that started Apr 22. Today’s intraday low at 149.05 is the first support.
• EURJPY meanwhile has faded off alltime highs on French PM Lecornu's resignation. EMAs in EURJPY continue to point to the upside, clearance of 175.13 resistance confirmed a resumption of the primary uptrend opens the 177.00 handle next. On the downside, key short-term support has been defined at 172.27, the Oct 2 low.
• Conversely, Takaichi moderated her firmer views on the BoJ during the campaign trail, and stressed the responsible approach to spending her government would adopt. As a result, JPY weakness could prove limited beyond today's moves, in which case 149.56 and 148.54 mark intraday supports before 147.47 would close the Takaichi gap.

• In FX, EURUSD is trading lower today but for now, remains above its recent lows. The primary trend direction is up and recent weakness appears corrective. Support to watch lies at 1.1690, the 50-day EMA. It has been pierced, a clear break of the EMA would signal scope for a deeper retracement and expose 1.1574, the Aug 27 low. For bulls, a clear resumption of gains would open 1.1923, a Fibonacci projection. First resistance is at 1.1820, Sep 23 high.
• A bear cycle in GBPUSD that began Sep 17 is intact, for now. Initial key resistance to watch is unchanged at 1.3537, the Sep 23 high and a near-term pivot level. Clearance of this hurdle would signal a potential reversal. Recent weakness resulted in a break of a trendline drawn from the Aug 1 low. Note too that 1.3333, the Sep 3 low and a key support, has been pierced. A resumption of the bear leg would open 1.3282 next, the Aug 6 low.
• USDJPY has started the week on a strong bullish note, gapping higher. Today’s rally has resulted in a breach of resistance at 149.96, the Sep 26 high and a key short-term resistance. This paves the way for a test of the key medium-term hurdle at 150.92, the Aug 1 high. A break of this level would confirm a resumption of the bull leg that started Apr 22. Today’s intraday low at 149.05 is the first support.