Unwinding of Takaichi trade – OCBC

USD/JPY extended its move lower as Japanese political developments continued to unravel. JPY fell 4% at one-point post-LDP election. Pair was last at 151.22 levels, OCBC’s FX analysts Frances Cheung and Christopher Wong note.

Political uncertainty may delay BOJ policy normalisation

“This decline was termed the Takaichi trade, due to perceived policies associated with the PM tobe Takaichi while market pushed out BOJ rate hike expectations. But Takaichi trade lost momentum after long-time partner Komeito party withdrew from LDP coalition and that the opposition parties appear to be uniting. A meeting will be held between opposition parties DPP, CDP and JIP today to discuss how they can close policy gaps and pick their choice of leader. It was reported that parliament will convene an extraordinary session on 21 October, selecting the date for a session widely expected to include a vote to pick the next prime minister.”

“Both lower and upper houses of the parliament will vote on its choice of PM and a simple majority rule is sufficient. But LDP alone does not have a simple majority. In the Lower House, LDP only has 196 seats while DPP, CDP and JIP combined will have 210 seats. To some extent, this may suggest that some of Takaichi’s policies may have to be watered down or there is greater risk that her proposed policies (if she wins) may not be passed smoothly in parliament.”

“Further unwinding of Takaichi trade is not ruled out but it remains to be seen what the policies of the opposition coalition are, at this point. Political uncertainty may also delay BOJ policy normalisation timeline though we argue that macro conditions are in place for BOJ to hike, even at the October MPC. Bullish momentum on daily chart shows early signs of fading while RSI fell. Risks skewed to the downside. Immediate support at 151 (38.2% fibo retracement of the run-up) before 150.35 (50% fibo) and 149.67 (61.8% fibo). Resistance at 151.90 (23.6% fib), 152.60 levels.”