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Yen Falls as Japan’s Election Results Blur BOJ Rate Hike Outlook

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The yen reached a three-month low on Monday following the loss of parliamentary majority by Japan’s ruling coalition, leading investors to anticipate a slowdown in future interest rate hikes. Concurrently, the dollar aimed for a monthly gain due to rising U.S. yields.

In early trading, the yen weakened to its lowest point since late July, reaching 153.3 against the dollar and 165.36 against the euro. According to public broadcaster NHK, Prime Minister Shigeru Ishiba’s Liberal Democratic Party, which has been Japan’s predominant ruling party for nearly the entire post-war period, along with coalition partner Komeito, secured 209 out of 465 lower house seats, with almost all results counted. This represents a decline from the 279 seats they held previously, marking the coalition’s poorest performance since its brief loss of power in 2009.

A period of complicated negotiations is expected, as cost-of-living concerns remain significant. Traders speculate that any newly formed government will likely urge the Bank of Japan to proceed cautiously with policy normalization. Analysts at Nomura have noted a perceived increased risk of more dovish economic policy.

In the broader currency markets, the dollar maintained its trajectory towards the largest monthly increase in two and a half years. This is attributed to signs of U.S. economic strength and speculation about Donald Trump winning the presidency, which have lifted U.S. yields. On Monday, the euro remained stable at $1.0795 but has declined by over 3% for the month. Sterling was valued at $1.2961, marking a drop of 3.1% in October.

The U.S. dollar index rose by 3.6% during October, its most significant monthly increase since April 2022. Ten-year Treasury yields increased by 40 basis points for October, compared to rises of 16 basis points for 10-year bunds and 23 basis points for gilts.

The Australian dollar traded at $0.6610 on Monday, negatively impacted by a lack of urgency in the Chinese government’s stimulus plans, which have contributed to a 4.5% decrease in its value throughout October. The New Zealand dollar hovered near a three-month low at $0.5974, down nearly 6% for the month.

The upcoming week is filled with important data releases, including inflation statistics for Europe and Australia, U.S. gross domestic product data, and purchasing managers’ indexes for China. Japan is scheduled to announce an interest rate decision on Thursday, although no change in policy is anticipated.

Weekend data indicated a substantial decline in China’s industrial profits for September, with a 27.1% decrease compared to the previous year. The yuan faced downward pressure in early offshore trade, heading for an anticipated monthly decline of around 1.9%.

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