The DXY dollar index fell to 101.40, hitting a five-week low. It lost 0.44% over the day. The reason is the outcome of the US midterm elections: the Democrats took both chambers of Congress.
DXY is the dollar's exchange rate against a basket of major currencies. The yen barely benefited from the dollar's weakness. USD/JPY is holding around 158.32, that is, down just 0.24%.
For a trader this means one thing. The move in the yen is driven by the dollar, not by Japan itself.
What did the numbers show?
In the Asian session on November 4, the pair broke below 158.00 and reached 157.39. By midday most of the decline had been recovered.
Against other currencies the yen is in the red:
- -0.39% - against the euro
- -0.36% - against the pound
- -0.41% - against the New Zealand dollar
Why is the dollar weakening?
A divided government means gridlock in decision-making. Uncertainty has emerged over the budget.
US Treasury yields moved lower on this. The dollar's weakening is the entire contribution to the USD/JPY move.
Why isn't the yen rising?
Derek Halpenny of MUFG calls the respite for the yen insignificant. He points to the structural outflow of capital from Japan.
- Outflow through NISA. This is a Japanese tax-advantaged investment program. Its limits were expanded, and Halpenny expects the outflow to continue at this volume.
- Inflation. It erodes savings held on deposits.
- US stocks. They offer higher returns.
- The Bank of Japan's 1.25% rate. The gap with other major economies remains wide and works against the yen.
Japan's Ministry of Finance is holding its position. The head of the ministry, Satsuki Katayama, said on Monday that Tokyo will respond to disorderly and excessively speculative exchange-rate moves.
Key point: past interventions in July and early August, according to MUFG's assessment, have already broken the usual link between the exchange rate and interest rates. Trading the rate differential by the old playbook has become more dangerous.
What's next for the dollar?
The week is packed with US data. The Japanese calendar is empty through the end of the week.
- Wednesday. ADP - the private-sector employment report. Forecast 69K versus 90K in September. Plus ISM services.
- Thursday. Jobless claims.
- Friday. NFP.
The market prices an 82% probability of a Fed rate change in December, based on CME FedWatch probabilities. All dates are in the economic calendar.
Did you short the yen and watch it get pushed back to 158?
The night passed with the dollar falling, and the pair came back. A week like this on USD/JPY is traded through limit orders and a hard stop. The question is what you trade it with: on a personal two or three thousand dollars, a figure on the yen gets closed out by a gas bill. Prop firms give a trader their own trading notional after a check on risk and discipline, leaving them the bulk of the result. It's calmer to study how this scheme works now than on Friday when NFP comes out.