Dollar Driven Higher by Japan's LDP Choice as next Leader and Prime Minister and the Collapse of the French Government

Overview: There are two main drivers today. The outcome of Japan's LDP leadership contest means Japan will have its first woman prime minister, She espouses the traditional LDP policy mix of expansionary fiscal policy and advocates easy monetary policy. The yen was sent reeling as were Japanese bonds, where the 40-year yield surged 15 bp to around 3.55%. Japanese stocks jumped 3%-4%. The second development was the unexpected resignation of the French prime minister who was in office less than a month. French bonds and stocks have been sold, and the euro has been dragged lower. Despite the continued shutdown of the US federal government and no sign of an off-ramp, the greenback is higher against nearly all the currencies today. 

The MSCI Asia Pacific Index rallied 2.75% last week, with mainland Chinese markets shut for the extended national holiday. Most bourses in the region continued to rally today (with Hong Kong and Australia the exceptions among the larger markets), led by Taiwan and South Korea. France's CAC 40 is off more than 1.6%, while the Stoxx 600 is snapping a six-day rally and is about 0.3% weaker. US S&P 500 and Nasdaq futures are 0.35%-0.55% higher. Benchmark 10-year yields are mostly 2-3 bp higher in Europe, though the French yield is almost eight basis points firmer and the 10-year Gilt yield is up five basis points. The 10-year US Treasury yield is three basis points higher at 4.15%. Gold has raced to a new record high near $3950 but is slightly below $3940 in late European morning turnover. OPEC+ announced a 137k barrel increase in output next month, which was not as large as some feared. This is helping support prices today. November WTI is up a little more than $1 a barrel and is straddling $62. Last week's high was a little above $65. 

USD: The dollar's rally after the FOMC meeting extended from around 96.20 to 98.60. It retreated to almost 97.40 last week and consolidated mostly below 98.00 in last few sessions. The combination of the sharp yen losses in response to the outcome of Japan’s LDP leadership contest and the surprise resignation of France's prime minister lifted the Dollar Index to almost 98.50 today. The high from late September was near 98.60. The 91.70 area is the (61.8%) retracement of DXY's loss since August 1, which has capped it for two months. With the US federal government still shut and no Federal Reserve or private sector on tap, sentiment, momentum, and market positioning have extra sway. 

EURO:  France's Prime Minister Lecornu was already expected to face a difficult confidence vote later this week but President Macron's cabinet appointments, which were largely similar to the past government sealed Lecornu's fate. He resigned after having the post for less than a month. French stocks and bonds have sold off. It is not clear what Macron will do. The euro has been sold from the pre-weekend close near $1.1740 to almost $1.1650. The low from late September was near $1.1645. A break signals a potential test on the $1.1600, which the euro has not closed below for two months. Less significantly, the eurozone reported a 0.1% increase in August retail sales after a revised 0.4% decline in July (initially -0.5%). That is the only aggregate data this week. Germany's August factory order (Tuesday), industrial production (Wednesday), and trade figures (Thursday). Before the weekend, France reported an unexpected sharp 0.7% decrease in manufacturing and industrial output in August after sharp declines in July were reduced dramatically in revisions (e.g., industrial production fell by 0.1% rather than 1.1%). Spain reports its industrial output rose by 0.3% in August (-0.5% in July). Italy reports its numbers at the end of the week. 

CNY: Mainland markets will re-open Thursday. The dollar was near CNH7.13 when the onshore market closed for the extended holiday. Since then, the greenback has traded between roughly CNH7.1225 and CNH7.14. It approached the upper end of the range before the weekend amid a generally soft US dollar environment. The broad dollar decline today saw the greenback climb to CNH7.15 area, which capped the greenback in September. Above there, the next interesting chart area is around CNH7.1545. 

JPY: The dollar's pullback from the peak seen on September 25-26 stalled last week near JPY146.55 and it recovered to JPY147.75. The key to the upside JPY148.25, where the 200-day moving average and the (61.8%) retracement of the recent pullback from JPY150 is found, but Takaichi victory in  the second round of the LDP leadership contest has driven the dollar to almost JPY150.45 today. The dollar gapped higher. Last Friday's high was about JPY147.80 and today's low was slightly above JPY149.00. Recall that the high from early August was closer to JPY150.90. Above there, JPY151.60 corresponds to the (61.8%) retracement of this year's dollar slide. After some formalities, she will be the next prime minister. The LDP lost its majority, but it is still the largest party in the Diet. Japan's CPI is second highest in the G10 behind the UK (3.47% vs. 3.50%). First thing tomorrow, Japan will reported August household spending. 

GBP: After retracting half of what it lost since the Fed's rate cut, sterling stalled near $1.3525 in the middle of last week. Amid the consolidative phase that emerged, it held above $1.3400. It settled near $1.3480 before the weekend and has been dragged back to slightly below $1.3420 today. A break of $1.3400 would target the low from late September near $1.3325. At the end of last week, the UK reported that new car registrations (a proxy for auto purchases) rose for the first time since June on a year-over-year basis. Today, it reported that the September construction PMI rose to 46.2 from 45.5 in August. It has not been above the 50 boom/bust level this year. 

CAD: The Canadian dollar fell to its lowest level since May last Thursday before consolidating ahead of the weekend. The 200-day moving average (~CAD1.3985) and the CAD1.40 level held. A break of CAD1.39 would suggest a high may be in place. Still, sentiment toward the Canadian dollar is poor and the decline in the September PMIs reported last week underscore the economic weakness. The Bank of Canada is seen as one of the few G10 central banks that will likely cut interest rates before the end of the year. The disruption of trade has been a significant drag on the economy. The August merchandise trade balance will be reported tomorrow, and the median forecast in Bloomberg's survey calls for a C$5.75 bln deficit, up from C$4.94 in July and almost a C$1.70 bln deficit in August 2024.

AUD: Last week, the Australian dollar snapped a two-week decline. The decline was marked by a key downside reversal on September 17, when the Fed cut interest rates. The Aussie had made a new high for the year and then turned around and settled below the previous day's low. The sell-off that was signaled, from a little above $0.6700, ended last Monday near $0.6520, overshooting the (61.8%) retracement of the rally that began in late August around $0.6415. It consolidated within last Tuesday's range (~$0.6570-$0.6630) in the last three sessions and is still in the range today. This week's Australian data, a thinktank's inflation measure and a bank's consumer confidence index, typically have little market impact. However, the highlight this week is in New Zealand, where nearly half of the economists surveyed by Bloomberg's survey anticipate a 50 bp rate cut in the middle of the week while indicative pricing in the swaps market puts it closer to a 30% probability. 

MXN: The dollar traded in a range of roughly MXN18.24-MXN18.5160 last Wednesday and Thursday before consolidating before the weekend. This range remains intact today, where the dollar is trading between MXN18.37 and MXN18.49. Mexico's September consumer confidence is reported today it draws scant attention. The week's key events come on Thursday: the September CPI and the minutes from the recent central bank meeting, which decided to cut the overnight rate (25 bp to 7.50%). The risk is that the headline rate (3.57% in August) moves toward the core rate (4.23%) rather than the other way around. Still, the minutes will likely reaffirm majority's view that the economic weakness warrants a less restrictive stance. The economy grew by 0.6% in Q2 (quarter-over-quarter), and the median forecast in Bloomberg's survey projects the economy stagnated in Q3. 

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