The major foreign exchange rates have remained relatively stable overnight after the pick-up in volatility in recent days triggered in part by the sell-off at the long-end of global bond markets. Global bonds recovered some lost ground yesterday providing some temporary relief and helping to stabilize the foreign exchange market, MUFG's FX analyst Lee Hardman reports.

Softer US labour market attracts attention

"The Japanese Yen (JPY) and JGBs have come under renewed selling pressure in recent days that helped to temporarily lift USD/JPY up to a high yesterday of 149.14 in response to fresh political uncertainty in Japan. There has been heightened speculation over the future of Prime Minister Ishiba. According to Bloomberg, the LDP is expected to vote on Monday on whether to bring forward a leadership election that is currently scheduled to take place in 2027. The party will be compelled to hold an early election if over half of the 342 party lawmakers and regional representatives seek one on Monday."

"However, the LDP have stated that the vote will not be anonymous which could work in Prime Minister Ishiba’s favour. Recent surveys from Yomiuri newspaper and broadcaster NHK have revealed that about 100 people are in favour of an early election compared to 50 who are against it whereas the remaining half of eligible electors are undecided. If an early leadership election is called, the yen could weaken further at least initially as market participants are wary that Sanae Takaichi, who came second in the last leadership contest, remains one of the favourites to be the next prime minister."

"The rise in USD/JPY in recent days has also been driven by board-based US dollar strength which helped to lift the dollar index by just over 1%. The US dollar initially benefitted from more risk-off trading conditions triggered by the sell-off at the long-end of global bond markets. However, it has given back some of those gains ahead of the release of the important nonfarm payrolls report on Friday. The US dollar’s upward momentum was undermined yesterday by the release of further evidence of softening US labour market conditions."