The US Dollar experienced a slight drop during the Asian trading session. This was partly because of positive news from France’s political scene and comments from Fed Chair Powell regarding balance sheet policy. Powell raised concerns about the risks in the labor market, suggesting that unemployment might rise due to fewer job openings. The OIS market already expected a 25 basis point rate cut on October 29th. Powell hinted at the end of Quantitative Tightening (QT) in the coming months due to tightening liquidity conditions, which he wanted to avoid repeating from 2019. While this caused a slight decline in longer-term yields, the 10-year yield still stays above 4.00%. Market participants are looking for a significant event to trigger a larger drop in yields, potentially linked to major credit market developments.

Rise Of The Yen

The yen became the best-performing G10 currency despite underperforming since early October because of political uncertainties. A successful 20-year JGB auction was seen despite these tensions. The LDP’s suggested election date shows some confidence, but discussions with the opposition indicate ongoing uncertainty. Political issues might impact the yen, but anticipated Fed rate cuts and the end of QT are expected to have a stronger influence on currency trends. Fed Chair Powell’s recognition of risks in the labor market strengthens the case for a rate cut. Recent data backs this up, with the September JOLTS report showing job openings at their lowest in nearly two years. Consequently, the market is pricing in a greater than 90% chance of a 25 basis point cut at the Federal Reserve meeting on October 29th. The strong indication that QT will soon end is important for the bond market. The Fed aims to prevent a repeat of the repo market issues from September 2019. This change in policy should lower longer-term yields, making strategies that benefit from falling rates more appealing. However, the 10-year Treasury yield remains above 4.00%, indicating that a larger shock is needed for a significant drop. Recent defaults of First Brands Group and Tricolor Holdings, though minor, remind us of the stress caused by excessive leverage. A major credit event could be the catalyst that drives yields down.

Sustained US Dollar Weakness

This environment indicates ongoing weakness for the US dollar, as the DXY index has fallen for five days straight. If market volatility rises due to a credit scare, a rush to safety could quicken. This situation benefits the Japanese yen and Swiss franc against the dollar in the coming weeks. While the ongoing leadership race in Japan’s LDP is a distraction, the direction of US monetary policy will mostly influence the yen. The potential for lower US rates and a weaker dollar is likely to keep the USD/JPY pair trending down. Political uncertainty may slow the yen’s performance against other currencies, but it is not enough reason to bet against it compared to the dollar. Create your live VT Markets account and start trading now.

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