USD/JPY risks tilted to the downside – Danske Bank

Christen Tuxen, Chief Analyst at Danske Bank, sees the pair grinding lower ahead of the snap elections, likely to be held in mid-October.

Key Quotes

“Japan’s Prime Minister Shinzo Abe announced yesterday that he will dissolve the Lower House on 28 September and call for a snap election (most likely to be held on 22 October)”.

“USD/JPY spot and vols did not move on Abe’s announcement as this was already highly anticipated. In our view, the fate of the Abe administration is likely to be linked to the current accommodative policy regime (Abenomics), and a change in leadership could increase uncertainty about whether Haruhiko Kuroda will be re-appointed. Hence, PM Abe’s survival is important for JPY in the medium term”.

“The most recent polls show that the government’s approval rating has continued to recover and currently, it seems most likely that PM Abe will maintain his majority after the election. However, we see risks skewed to the downside for USD/JPY and expect the short end of the vol curve to increase ahead of Election Day”.