JPY and EUR tumble on fresh political risks – Scotiabank

The Japanese Yen (JPY) and Euro (EUR) are showing material losses to start the week as market participants digest the latest political developments in Japan and France. Sanae Takaichi was elected as the new LDP leader in this Saturday’s leadership election and she is expected to become Japan’s first female prime minister in mid-October following a handoff from departing PM Ishiba, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD strengthens broadly vs. most G10

"Takaichi’s pro-stimulus leanings have weighed on the yen, delivering a near-2% decline from Friday’s close as market participants have reacted to the possibility of renewed fiscal stimulus and potential pushback against the BoJ’s tightening plan. In France, Prime Minister Lecornu has resigned less than 24 hours after President Macron unveiled a cabinet that offended opposition parties. Macron’s cabinet was seen as having retained too many of the senior members from previous cabinets and thus failed to delivered a sufficient change in terms of its composition. Macron must now decide whether to name a new PM, call a parliamentary election, or resign ahead of an October 13 budget deadline."

"The reaction in EUR has also been swift, with a 0.7% decline vs. the USD. The euro area government bond market has also responded, lifting yields for all of the major members while widening key differentials (Italy-Germany, FranceGermany) in a manner that marginally reflects renewed concerns about fiscal fragmentation. The reaction across the rest of the G10 currencies is mixed, but leaning towards USD strength overall with lesser losses for SEK and CHF (down ~0.5% vs. the USD), minor losses for GBP, NZD, AUD, and MXN (down ~0.3%), and relative outperformance for the CAD and NOK—both trading flat vs. the USD. The broader market’s tone is holding in remarkably well, as the US government shutdown extends into a second week."

"US equity futures appear well supported near record highs and US Treasury yields have gapped higher while still remaining within their prior range. In commodities, oil prices are showing signs of a meaningful bullish reversal from last week’s losses despite OPEC’s weekend decision to increase supply. The price of copper is trading defensively following a spectacular rally that retraced roughly half of the tariff-related losses from late July. Finally, the price of gold has extended to a fresh record high, nearing $3950/oz in an environment of broadening political risks across the US, Europe, and Japan. In terms of data, there are no US releases scheduled for Monday’s NA session. The Fed’s speaking schedule is limited to KC Fed President Schmid (voting) at 5pm."