Yen Strengthens After Ishiba Wins Leadership Vote

• Yen strengthened last Friday after Shigeru Ishiba won the ruling party leadership vote.

• The Chinese equity market remains robust as opposed to Wall Street, which was weighing on Yen carry trade.

• The dollar eased after the U.S. PCE reading came lower than the market consensus.

Market Summary

The financial markets were shaken by the unexpected victory in the Japans ruling party's leadership race, which is set to replace the current Prime Minister of Japan. The win by Shigeru Ishiba, seen as favouring a more hawkish stance on monetary policy, led to a significant strengthening of the Japanese Yen, as his opponent, Takaichi, who was perceived as dovish, lost the race. As the Yen surged, the Nikkei 225 index suffered, reacting negatively to the stronger Yen. Concerns over the Yen carry trade also caused Wall Street to pause on Friday, with traders wary of potential volatility.

Conversely, the Chinese equity market remained resilient, buoyed by the governments continued economic stimulus measures. The Hang Seng Index in Hong Kong reached its highest level since May 2023, indicating a bullish outlook for the index.

In the forex market, the U.S. dollar came under pressure from last Fridays softer-than-expected Personal Consumption Expenditures (PCE) data, with the Dollar Index (DXY) struggling to hold above the critical $100 support level. The weakening dollar has propelled the AUD/USD pair to its highest level since March 2023, although it awaits a fresh catalyst to break through the current resistance.

In the commodity market, gold failed to capitalise on the softening dollar but remains trading above the $2650 mark, suggesting ongoing bullish sentiment. Meanwhile, oil prices were dampened by disappointing Chinese PMI data, which signalled a continued slowdown in the country's economic activity.

Current rate hike bets on 7th November Fed interest rate decision:

Source: CME Fedwatch Tool

-50 bps (32%) VS -25 bps (68%)

Market Movements

DOLLAR_INDX, H4

The Dollar Index, which measures the dollar's performance against a basket of six major currencies, extended its losses following a weaker-than-expected inflation report from the US. According to the Bureau of Economic Analysis, the US Core PCE Price Index declined from 0.20% to 0.10%, missing market expectations of 0.20%. This downbeat inflation data has increased expectations of aggressive rate cuts, with the CME's FedWatch Tool now showing a 56.7% chance of a 50-basis point cut at the Federal Reserve's November meeting, up from 49.9% before the report.

The Dollar Index is trading lower while currently testing the support level. However, MACD has illustrated diminishing bearish momentum, while RSI is at 43, suggesting the index might experience technical correction since the RSI rebounded sharply from oversold territory.

Resistance level: 101.80, 102.35

Support level: 100.25, 99.70

Gold prices are trading lower following the prior retracement from the resistance level. MACD has illustrated diminishing bullish momentum, while RSI is at 43, suggesting the commodity might extend its losses since the RSI stays below the midline.

Resistance level: 2665.00, 2695.00

Support level: 2640.00, 2620.00

USD/JPY, H4

The Japanese yen strengthened after Shigeru Ishiba won the leadership contest of Japan‘s ruling Liberal Democratic Party. Ishiba, a former defense minister, is known for his critical stance on past monetary stimulus and has endorsed the central bank’s rate hikes. This leadership change surprised markets, which had been expecting a victory for nationalist Sanae Takaichi, who opposed further rate hikes. As a result, the yen saw upward pressure amid shifting expectations around Japan's monetary policy.

USD/JPY is trading lower while currently testing the support level. MACD has illustrated increasing bearish momentum, while RSI is at 39, suggesting the pair might extend its losses after breakout since the RSI stays below the midline.

Resistance level: 144.25, 146.60

Support level: 142.25, 139.75