Yen perky as Japan fiscal fears dissipate, Aussie jumps on hawkish RBA

SINGAPORE: The yen held on to solid gains on Wednesday as investors bet that Prime Minister Sanae Takaichi’s landslide election victory puts her in a strong position to pursue more fiscally responsible policies.

Elsewhere, the Aussie broke above $0.71 for the first time in three years.

The dollar wobbled ahead of the key US non-farm payrolls report due later on Wednesday, after a run of data overnight hinted at a softening in the world’s largest economy.

The yen was up nearly 0.4% against the dollar at 153.80, building on a 1% rise in the previous session that also saw it rally against other currencies.

The euro fetched 183.15 yen after a 1.2% drop on Tuesday, while sterling extended the previous day’s 1.3% fall against the Japanese currency and was down 0.28% at 210.00 .

Trading was thinned in Asia due partly to a holiday in Japan.

“Such a sweeping victory hands the Takaichi regime better control over the JGB bearish and the yen bearish aspects of the so-called Takaichi trade,” said Vishnu Varathan, Mizuho’s head of macro research for Asia ex-Japan.

“She can have a more coherent fiscal policy… she’s definitely got a plan which is going to make numeric sense, so there should be less doubt around that. What she needed was the political capital to pull it off, without having to make multiple compromises to many parties who want to do more (stimulus).”

The yen and Japanese government bonds have risen in the wake of Takaichi’s resounding win while investors have also poured into Japanese stocks in anticipation of stimulus flowing to consumers and Japan Inc.

Foreign inflows into Japanese equities increase demand for the yen.

Yusuke Miyairi, Nomura’s JPY FX and rates strategist, said dollar/yen could catch up with narrowing U.S.-Japan rate differentials and fall to around 150 if investors view Takaichi as becoming more fiscally responsible.

Hawkish outlook

The Australian dollar broke above the key $0.71 level on Wednesday for the first time since February 2023. It traded 0.7% higher at $0.7124.

A top Australian central banker said on Wednesday inflation was too high and policymakers were committed to doing whatever was necessary to bring it to heel.

“We have upgraded our Aussie dollar view… the end-year forecast is $0.73 from $0.69,” said Moh Siong Sim, a currency strategist at OCBC.

He noted that the Reserve Bank of Australia’s rate hike last week established it as the first G10 central bank outside of Japan to do so, adding “that hawkish hike will put additional focus on whether the RBA would follow with more hikes down the road.”

Markets imply around a 70% chance rates will rise to 4.10% at the RBA’s May meeting, following the release of first-quarter inflation figures.

Across the Tasman Sea, the New Zealand dollar was up 0.32% at $0.6063.

Waiting on payrolls

Elsewhere, US jobs data was the main focus for investors on Wednesday, where expectations are for nonfarm payrolls to have risen by 70,000 in January. The unemployment rate is seen holding steady at 4.4%.

Ahead of the release, the dollar was on the back foot, with the euro trading 0.14% higher at $1.1912 while sterling similarly rose 0.14% to $1.3661.

Against a basket of currencies, the greenback was down 0.27% at 96.66.

Overnight, the U.S. posted slower-than-expected retail sales in December, while a separate report showed growth in U.S. labour costs unexpectedly slowed in the fourth quarter.

“Tonight’s non-farm payrolls for January will be more important for the FOMC policy outlook,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia, in a note.

“We expect the run of below consensus payrolls to continue and weigh on the USD.”

White House economic adviser Kevin Hassett said on Monday that Americans could see smaller job growth numbers in the coming months due to lower population figures and higher productivity.

Markets are now pricing in roughly 60 basis points worth of easing from the Federal Reserve by December, even as some policymakers said rates could remain on hold for some time.