Near-term price action in USDJPY is likely to be determined by the outcome of this weekend’s Japanese Parliamentary elections, where Prime Minister Abe’s party looks to gain an outright majority.
It's been a very quiet night of trade in the currency market as the summer stall is seemingly upon us. USDJPY was the primary mover of the overnight session, however, first rising to weekly highs of 100.87 at the start of Asian trade, only to tumble sharply after the Nikkei saw a 2.7% plunge in a matter of minutes.
Traders had little explanation for the sharp selloff in the Nikkei except that a large macro fund may have been liquidating its position ahead of this weekend's Japanese election. USDJPY eventually rebounded and stabilized around 100.30 in European morning dealing.
Although the G-20 will meet this weekend in Moscow, the primary focus of the FX market remains on Japan, where Prime Minister Shinzo Abe's Liberal Democratic Party (LDP) party is expected to do well in parliamentary elections, but just how well remains an open question. In order to obtain an outright majority, the LDP needs to win 72 seats, but the polls put the LDP at the 65-66 seat rate, which would mean that it would still have to govern in a coalition.
See related: Growth Potential Japan Has Waited Years for
If the LDP is able to capture an outright majority of seats, USDJPY could gap open higher on Sunday, possibly challenging the near-term swing highs at 101.50. If, on the other hand, the winning margin is more modest, USDJPY could slip below the 100.00 mark on knee-jerk profit taking.
What appears clear is that barring any sharp surprises in the outcome, Prime Minister Abe is likely to consolidate his power and maintain course for accommodative fiscal and monetary policy. That, in turn, should prove bullish for USDJPY unless the Japanese government bond market turns volatile once again.
Elsewhere, major currencies continued to tread water in very listless London trade with virtually no data on the economic calendar. In today’s North American session, the calendar is barren and price action may continue to be slow as traders’ attention is focused more on the heat wave in New York and not the activity on their screens.
By Boris Schlossberg of BK Asset Management