North American FX Open - Japanese leadership result causes major Usd/Jpy sell-off

The DOLLAR has come under significant pressure again overnight, with traders seemingly positioning themselves for the possibility of a downside miss in the US Core PCE Price Index for August. Overnight though the main focus has been on Usd/Jpy, which has again traded in an extremely volatile manner.

The main focus was on the battle for the leadership of Japan's ruling party, the LDP, who will become the next PM, replacing the outgoing Kishida. Usd/Jpy surged to 146.49, when the dovish Takaichi was seen as having the support of a number of key LDP officials including Aso, but in the end the hawkish Ishiba won the vote by 215 to 194 in the run-off. Many lawmakers believed Takachi did not command the broad appeal of the electorate, as the party likely needs to be planning for a fresh general election. There was also much discussion about the make-up of Ishiba's cabinet and whether there will be room in it for Takaichi.

The Ishiba victory sent Usd/Jpy spiraling lower, down to 142.80 within moments, before it settled down in the low 143.00s, as a pre year-end BoJ rate hike is now seemingly back on the cards.

October ECB rate cut expectations received another boost from sizeable downside misses in both French and Spanish flash CPI readings for September. French CPI on a headline basis fell to just 1.2% y/y, way below the 1.6% y/y forecast and the 1.8% y/y print in August. It was also notable that services inflation eased as well, to just 2.5% y/y. The headline rate is now at its lowest reading since April 2021. Meanwhile Spanish core inflation slowed to 2.4% y/y in September, way below the 2.8% y/y consensus.

If the German numbers on Monday and the Eurozone flash figure on Tuesday follow the same pattern as the French and Spanish data, expectations for an increase in the pace of ECB easing, with a cut in October will intensify further.

Goldman Sachs stated that they are now expecting a rate cut in October, compared to December previously.

Eur/Usd slipped to 1.1125 in response, but the Dollar selling saw the pair rebound hastily to the 1.1160/70 area.

Also overnight, Bbg reported that China cut the amount of cash banks must keep in reserve today and lowered the seven-day reverse repurchase rate to 1.5% from 1.7% key policy rate, as Beijing continues this week's strong policy action in a push to support the stalling economy and investor confidence, as doubts remain the about 5% growth target for 2024 can be achieved.

As well as the US PCE report today, we also receive updates on personal income/spending, advanced trade, wholesale and retail inventories and the UMich sentiment report.

The focus north of the border is on the Canadian GDP print for July and the August flash.

We should hear from the Fed's Collins, Kugler and Bowman, the ECB's Nagel and the Riskbank's Thedeen.

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