MUFG’s Lee Hardman notes that the Japanese Yen has extended its rebound after Japan’s lower house election, with USD/JPY dropping from 157.76 to 152.80 and moving closer to late-January lows. He argues that markets may have already priced sufficient Japanese policy risk, while softer US data and revived Fed rate cut expectations support a weaker Dollar and potential further downside in USD/JPY.

Yen strength as Fed expectations shift

"USD/JPY initially rose to a high of 157.76 after it was confirmed that the LDP had won a super majority on their own, but the pair has since fallen sharply and hit a low overnight 152.80 moving back closer to the lows from in late January at 152.10."

"The yen’s failure to weaken further even after Prime Minister Takaichi strengthened her grip on power in Japan has likely encouraged speculators to further scale back short yen positions in the near-term."

"The rebound for the yen indicates that market participants may have already priced in a sufficient policy risk premium into the yen."

"USD/JPY was trading between 145.00 and 150.00 prior to the change in LDP leadership in the autumn before rising back closer to the 160.00-level at the start of this year."

"Whether US dollar’s sell-off extends further this week will depend on the release of the delayed nonfarm payrolls report for January later today."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)