USD/JPY has posted gains in the Tuesday session, erasing the losses at the start of the week. In North American trade, USD/JPY is trading at 113.95, up 0.45% on the day. On the release front, there are no major events on the schedule. Japanese Flash Manufacturing PMI came in at 52.5, missing the estimate of 53.1 points. In the US, the Richmond Manufacturing Index softened to 12 points, well off the forecast of 19 points. This marked its weakest gain since June. On Wednesday, the US will release Core Durable Goods Orders and New Home Sales.
Japanese voters went to the polls on Tuesday, and there were no surprises as Prime Minister Shinzo Abe cruised to an easy victory. Abe’s Liberal Democratic Party and a small junior coalition party won a convincing victory, winning at least 312 seats out of 465 seats in the lower house of parliament. The result gives Abe a two-third majority in both seats of parliament, which will allow him to continue his policies. We can expect to see the ultra-loose monetary policy continue until inflation moves closer to the Bank of Japan’s target of around 2 percent. Although Abe won a decisive victory, his popularity remains low. The LDP took full advantage of a divided opposition which failed to provide the Japanese voter with a credible alternative. The Tokyo stock markets posted gains after the election, but the Japanese yen responded with slight losses.
The guessing game at the Federal Reserve continues, as investors await the next choice for Federal Reserve chair. Janet Yellen’s 3-year term expires in February, and President Trump has said he will nominate a new Fed head in the coming days. The front runners are economist John Taylor and Federal Reserve Governor Jerome Powell. Taylor advocates a rule in which rates which be as high as 3 percent, given current economic conditions. Powell is more closely aligned to Fed Chair Janet Yellen’s monetary stance which advocates an incremental increase in rates. With the two candidates representing sharply differing views on interest rate levels, Trump’s choice for the new Fed chair could have have an effect on monetary policy and the strength of the US dollar. Still, most economists are of the view that monetary policy will be largely driven by the performance of the US economy. Inflation levels remain weak and may not reach Fed’s target of 2 percent before 2020, but that has not dampened expectations of a December rate hike. According to CME FedWatch, the odds of a raise in December stand at 96 percent.
