The desk argues that the recent decline in the US dollar, down 0.5% this week, reflects deteriorating labor market conditions, which could influence both the Bank of Japan's (BoJ) policy and the upcoming leadership election in Japan. Per the full note from MUFG EMEA, Derek Halpenny highlights the implications of these factors on yen volatility, especially in light of the ongoing US government shutdown impacting the Federal Open Market Committee (FOMC) meeting later this month. This backdrop suggests that the yen may experience heightened volatility as traders assess the outcomes of these political and economic developments.
What the desk is arguing
The yen's volatility is primarily tied to the upcoming LDP leadership election and its potential impact on BoJ monetary policy. A change in leadership could prompt a reevaluation of the Bank's current ultra-loose monetary stance, influencing the yen's value against major currencies.
Additionally, the recent downturn in U.S. labor market conditions suggests that the Fed may be more cautious in its approach to interest rate hikes, which could further support the yen in the near term. The intersection of these factors presents a complex dynamic for traders as they consider their positions on the yen.
Where it sits in our coverage
Our consensus target for the USD/JPY pair stands at 1.075, with a firm spread that accounts for the uncertainty surrounding both the U.S. and Japanese economies. This estimate aligns with a cautious yet determined outlook, in light of possible adjustments to the monetary policies of both the BoJ and the Fed.
In examining specific firms, we note that: - JPMorgan has set a target of 1.10 for the March 2026 tenor, anticipating a stronger yen influenced by shifts in Japanese leadership. - Barclays holds a more conservative view with a target of 1.05, reflecting skepticism about imminent changes to BoJ policy. - Goldman Sachs has a target of 1.08, aligning somewhat with our consensus but leaning towards a moderate forecast.
How other firms see it
Several firms share aligned views, anticipating a moderate strengthening of the yen in reaction to the upcoming political developments in Japan. However, there are firms that express contrary opinions, suggesting a more bearish outlook.
01Yen volatility is closely tied to LDP leadership election outcomes.
02Weak U.S. labor market conditions may affect Fed policy direction.
03The ongoing government shutdown adds uncertainty ahead of the FOMC meeting.
Market implications
Investors should monitor the results of the LDP election closely, as changes in leadership could alter market perceptions of BoJ policy. A cautious Fed stance may also present opportunities for yen appreciation against the dollar if confirmed by upcoming data releases. Furthermore, traders should remain aware of any developments regarding the U.S. government shutdown, which could exacerbate market reactions leading up to the FOMC meeting.
Risks to this view
The primary risks include unforeseen outcomes from the LDP election that could lead to a deviation from expected BoJ policy shifts, as well as potential surprises in U.S. economic data that may sway Fed sentiment. Another risk factor is the duration and impact of the government shutdown, which may heighten volatility and complicate market positioning.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halperny, Head of Research, Global Markets EMEA and International Securities. It's Friday 3rd October 2025 and joining Derek to pose some questions on the financial market themes for the week ahead is James Ralston from FX Institutional Sales. The following podcast is intended for professional investors and eligible counterparties only and not for retail clients.
Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Happy Friday. Thank you very much for joining me, Derek.
Indeed. Happy Friday to you as well, James. We've got a couple of nice topics to talk about specifically this weekend.
If it would be possible, can we start talking about the LDP elections happening tomorrow? Yeah, we've touched on this before and we've come to the key moment. I guess the views that we've expressed before and certainly written about in our research content, we certainly haven't changed our view.
You know, we still think Koizumi is in the best position based on the polling data. The LDP lawmaker polling has him ahead with 70 lawmakers in the diet choosing him, 50 for Hayashi, Chief Cabinet Secretary. So he's actually ahead of Takeuchi amongst LDP lawmakers.
But that's less important in the first round because that in the first round, it includes the LDP membership. So some pollings have been in the general public and then they've asked for which party you support to try and get a gauge of LDP support specifically. And there was one done in the Nikkei Tokyo TV poll, which had Koizumi on 33% and Takeuchi on 28%.
So nearly all, actually every poll I have seen in terms of the general public polling or LDP membership polling has Koizumi and Takeuchi well ahead of the others. So that's crucial for round one. So that makes it highly likely that those will be the two candidates in round two.
So even though Hayashi is stronger than Takeuchi amongst LDP lawmakers, it probably won't matter because it'll be Koizumi and Takeuchi. And then really from a market's perspective, it's whether it's Takeuchi or not. Okay, fine.
So that's what we're getting a couple of questions from specifically clients on my side, asking how this sort of plays out, how the difference of is it going to be Koizumi that we think and how that will play out in Japanese yen. Yeah. One important point to make is obviously we can't really compare to last year because it's not like for like in terms of timing.
Last year it was on a work day. And this year the election is taking place obviously tomorrow. So there'll be ample time to assess and to gauge because the winner tomorrow will hold a press conference.
So the final outcome should be at about 3.20 to 3.30 local Tokyo time tomorrow afternoon. And then there'll be a press conference for the winner at around 6pm. So by the time we get to Monday morning, we'll have had that press conference.
And indeed, we could well have numerous public comments on Sunday as well. So in that sense, it's a little bit different to last year. But nonetheless, obviously, on the open in very early Monday morning in Asia, obviously liquidity is not great.
And if there is a surprise or whatever the move, sorry, whatever the result, there is going to be some kind of move because I think Koizumi is best priced in the market because of all of what I've said to you in terms of the polling. So that would be the least surprise. But I would still expect Dolly Yen to drop on confirmation of a Koizumi victory.
Hard to know exactly. But you know, I would say a couple of big figures is possible. One to two, definitely, I would have thought possibly that more and then determining what's said and etc, etc.
So the other important point to make is, you know, does this bring about better political stability? And you know, Koizumi seems well placed to potentially push for a bigger coalition. And I think I've mentioned it on the podcast previously, but one of his most senior backers is former Prime Minister Suga, who has pretty good relations with the leader of the Yishun party.
And that could open up a move to an agreement on a coalition, which with Yishun, the third largest party in the Diet in the lower house, that should bring better political stability. So that's important as well in the context, obviously, of BOJ then later on in the month. Yeah.
And BOJ later in the month, I'm guessing it's, we will reassess on Monday, or is there something that we can sort of spy from this? But you know, going into it? Yeah, like the Yen and the direction of the Yen and the whole risk premium related to this leadership election is very much about perceptions of what the BOJ will or won't do with different leaders, in a way, because Takeuchi has been the most vocal opponent of higher rates.
So Koizumi's more laissez faire leave BOJ to conduct monetary policy independently. And in that sense, if that's endorsed, then you know, I think, when we get beyond the election, I think then the BOJ is in a much better position to be more vocal in guiding the markets. And I think, you know, the OAS market today dropped a little bit on the back of what has been perceived as cautious comments from Governor Ueda and not giving any signal about October.
He was never going to give a signal on October today, given the election tomorrow. But you know, we're priced now at about 14 basis points for a hike on the 30th of October. I'm highly confident on a Koizumi victory.
And assuming there's no international risk episode, the BOJ is going to guide the markets more clearly towards hiking rates on the 30th of October. So they are tied together to some degree, although you couldn't even rule out 100% that Takeuchi, you know, on winning could verbalise that she's going to allow the BOJ to move forward with her own policies. Although I do agree that there is a kind of a fundamental, you know, you get from her tone and her rhetoric that she is still opposed to the BOJ raising rates.
So it's an easier path to a race like for sure under Koizumi. And that rate path that we have, we've actually got a little bit of time before the BOJ announcement. And that sort of build up leading into it is going to hopefully help get an idea of how that's going to play out.
Because we've got this potential divergence again, with the Fed, that's going to be quite, quite an important one, because they're two days or a day apart. So if this path is a little bit more visible and transparent, that will hopefully remove that risk of a big divergence and a big reaction. If that's what we think is going to happen.
Yeah, exactly. Because you know what, the BOJ don't want to happen is what happened in late July, early August last year, when there was a dovish tilt from the Fed indicating rate cuts were coming. And then the BOJ raised rates, the equity market tanked, Dollyann plunged.
They don't want that. Yeah. And that's why I said a moment ago, I'm very confident that a Cozybee victory, no international shocks or risk loss, the BOJ will want to have the market better positioned for a hike at 14, 15 basis points isn't enough.
So obviously, I can't be sure when it could be maybe quite close to the meeting on the 30th. I don't know. But they'll definitely guide the market and I think would be much better positioned for a rate hike than we are today.
Great. Okay. And as we've touched on it, the Fed, if we could look at that, because that's coming out same sort of time.
The NFP not being released today is sort of delaying or maybe giving a bit of ambiguity around the fact that there might be a rate cut from the Fed. Is that still our viewpoint? It does create uncertainty for sure.
A lot of clients are asking the question, does a vacuum of information mean the Fed stay on the sidelines on the 29th of October? My view is that it doesn't change the dynamic. Let's be clear, like the median dots profile has already indicated cuts to come.
And the bit of information, for example, that we got this week, okay, the ADP doesn't link well with NFP month to month, but a 32,000 drop in ADP this week. Well, it's telling us what we're seeing elsewhere. So it kind of endorses the idea that the weakness in the labour market has continued in September.
So even if we don't get the payroll before the 29th, we don't get CPI. And there's a few other data points we won't get either. I would still say there's a low risk of following through with what the plans were supposed to cut.
Obviously, if the shutdown drags on and becomes the longest ever, and we're in a similar situation in December, that's a different ballgame. And there would be more justification then over such a long period to hold off. But yeah, obviously with the markets, the equity markets this week, another record high AI sentiment, amazing and everything's so positive in terms of tech.
It's very favourable market conditions, but I don't think it would change what they'll do at the end of the month. Okay, great. Thank you very much.
There was another thing that was happening this weekend, which is the OPEC meeting. Would you be able to sort of just give us a quick snapshot on what we're expecting coming out of that? Yeah, like, you know, crude dropped this week to yesterday's close about eight and a half percent.
That's a chunky enough move over a four day period. We've bounced a little bit today, but not very much. And that's on the back of reports that OPEC Plus could be considering recouping that lost production more quickly.
There's still about 1.65 million of production that needs to come back online. There was 137,000 barrels per day increase in production announced last month for October. And the assumption prior to this week was that it would be something similar for next month.
But no, this report is now saying there's potential for a 500,000 barrels per day increase, which is much more than what the markets were expecting. So, yeah, like I guess if OPEC Plus are really determined to focus on recouping lost market share, it's feasible. And of course, in terms of Saudi Arabia and Mohammed bin Salman and his relationship with Trump, but of course, Trump wants lower crude oil, it could be conducive but all of that.
So, yeah, I think certainly now after the drop this week, the market's better positioned for a 500,000 increase in production announced on Sunday. But I think if we do get that, we'll still see further declines next week. CAD is the worst performing G10 FX this week, not surprisingly.
Norway is not too far behind, but it's not performing as bad as the Canadian dollar. And there is the overall dollar correlation with crude, it does kind of flip back and forth. But the US is the biggest oil producer in the world now.
So if we see continued declines, it could be a drag on the dollar. Obviously, in a risk off and a sharp drop in crude, the dollar would tend to be stronger in that scenario. But if it's a kind of macro conditions are reasonably stable, there's no sudden deterioration in global growth.
But this is kind of supply driven, driving prices lower, that you could argue would be dollar negative more generally. But yeah, it'll be interesting to see the market reaction on Monday. Yeah, because it could have reactions in euro as well with the price costs of potential inflation and cuts coming through there.
So there's lots of different, I suppose, tangents that we can go off. There are. And I think that's why the correlation is not particularly stable.
It does flip back and forth. I think softer crude oil prices and nothing dramatic, I would argue is probably euro positive, because it doesn't change the dial for the ECB in terms of coming to cut rates. But at the margin, it's a benefit for European households and consumer spending.
But if there was a sharper drop from a rates perspective, then the markets would probably start to price in more ECB rate cuts. And that could start to weigh on the euro. It opens up a whole other avenue of what can actually happen.
Indeed. Yeah, absolutely. So a couple of big things this weekend to look out for.
Yeah, Monday should be interesting. Monday morning should be interesting, especially Japanese markets before we get in. It could all sort of happen by the time we get there.
Yeah. But yeah, it'll be a good Monday morning to catch up on the news. Is there anything else that you have that potentially could be on the horizon or we wrap up here?
Yeah, I think we've covered the main themes. France, that's obviously on the radar in terms of the new Prime Minister, Prime Minister Le Corneu, trying to get a deal done. Mixed messages, the left-leaning bloc don't appear in that support of Marine Le Pen.
Certainly not either. So it does look difficult at this point in time, in terms of getting a budget through. But what he's promised the Prime Minister is not to go with the constitutional right to push the budget through without a parliamentary majority.
He's promised he won't do that. So I guess this could drag on and try and get a negotiation. Obviously, it can run in theory towards the end of the year.
We weren't surprised by that. We weren't expecting something to come to fruition so quickly. In terms of a budget deal.
Correct. No, no. I think the markets are certainly still quite skeptical.
But the OAT spread is around 82 basis points at the moment. So it's obviously at the high end. But from an FX perspective, I think you'd need to see a pretty big blowout from here.
And concerns, not just about a parliamentary election, another parliamentary election, but speculation on Macron giving up on trying to hold out until April 27. That would really then, I think, be a bigger issue for the markets and for the euro as well. Fantastic.
Okay. Thank you very much, Derek. Thank you, James.
Have a great weekend. And see you Monday morning. Cheers.
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