USD/JPY continued to drift lower amid unwinding of Takaichi trade. Pair was last at 151.26 levels, OCBC's FX analysts Frances Cheung and Christopher Wong note.

Risks skewed to the downside

"Fallout of the alliance with Komeito, which means it becomes more challenging for LDP leader Takaichi to become PM, the recent flare-up in trade tensions between US and China and the lower USD/CNY fix were some of the reasons behind the pullback in USD/JPY. We should continue to expect more political jostling amongst politicians ahead of 21 Oct, when the parliament will meet and likely vote on choice of PM. LDP party has spoken to JIP while other opposition parties are discussing the plausibility of uniting support for a candidate."

"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, short of 233 needed. 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 may not be passed smoothly in parliament (assuming if she wins and need to compromise on her earlier stance)."

"On BOJspeaks, Tamura said that policy rate should be closer to neutral level, need to avoid risk of rapid rate hikes but no need to raise rate to restrictive levels. We believe macro conditions are in place for BOJ to hike, even at the October MPC. Bullish momentum on daily chart is fading while RSI fell. Risks skewed to the downside. Next support at 150.35 (50% fibo) and 149.67 (61.8% fibo). Resistance at 151.90 (23.6% fibo)."