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Yujiro Goto, Research Analyst at Nomura, notes that the USD/JPY has been trading resiliently ahead of the US midterm elections tonight and points out that the pair tends to react positively to both higher UST yields and higher US equity prices.

Key Quotes

“While a divided Congress (Republicans secure a majority in the Senate, Democrats gain a majority in the House) is the most likely outcome, if Republicans keep the majority in both houses, we would expect US rates and equity prices to react positively (a Democrat victory could lead the opposite reaction, in our view). Thus, USD/JPY is the cleanest G10 pair through which to watch the midterm polls.”

“We expect the near-term direction of USD/JPY to be dominated by the outcome, with our estimates showing that our base case divided Congress would be slightly negative for USD/JPY (-0.25%).”

“After an expected outcome, we believe market focus will return to fundamentals and central banks’ policy stance. Even though there have been numerous political headlines (these elections, US-China trade negotiations, Brexit), we note the correlation between USD/JPY and rate spreads has stayed strong. This shows a clear difference from USD/JPY trading behaviour early this year. The rise in US yields is also supported by the recovery in US economic data momentum.”

“We expect US yields to be more sensitive to data surprises as the Fed has progressed its policy normalization toward neutral. As US data has remained healthy, upside risks of US yields are larger than downside risks, in our opinion, while the Fed is still on course to hike once every quarter. Beyond US midterm election, strong US data and higher rates should support USD/JPY.”