Insights 
VT 
The US Dollar saw a slight decline during the Asian trading session. This was partly due to optimism in France’s political situation and comments from Fed Chair Powell on balance sheet policy. Powell expressed concerns about labour market risks, indicating a possible impact on unemployment due to fewer job openings. The OIS market had already anticipated a 25 basis point cut on 29th October.
Powell’s remarks on balance sheet policy suggested an end to QT in the coming months. This was due to signs of tightening liquidity conditions, which he wanted to avoid repeating from 2019. While this lowered longer-term yields slightly, the 10-year remains above 4.00%. Market participants await a potential catalyst for a notable yield drop, which could result from larger credit market events.
Rise Of The Yen
The yen rose as the top-performing G10 currency, though it has underperformed since early October amid political uncertainties. Despite political tensions, a strong 20-year JGB auction was observed. The LDP’s suggested PM election date shows confidence, but ongoing opposition talks indicate uncertainty. Political issues may weigh on the yen, but potential Fed rate cuts and QT’s end are expected to drive more impact on currency trends.
With Fed Chair Powell now openly acknowledging downside risks to the labor market, we see the case for a rate cut as solidified. Recent data confirms this view, with the September JOLTS report showing job openings falling to their lowest level in nearly two years. As a result, the market is pricing in over a 90% probability of a 25-basis-point cut at the Federal Reserve meeting on October 29th.
The strong signal that Quantitative Tightening (QT) will end soon is a crucial development for the bond market. We remember the repo market turmoil in September 2019, and it appears the Fed wants to avoid a repeat of those liquidity issues. This policy shift should apply downward pressure on longer-term yields, making strategies that benefit from falling rates more compelling.
Still, the 10-year Treasury yield remains stubbornly above 4.00%, suggesting the market requires a bigger shock to move lower. The recent defaults of First Brands Group and Tricolor Holdings, though small, are reminders of the stress caused by excessive leverage in the private capital space. A more significant credit event would likely be the catalyst that pushes yields decisively lower.
Sustained US Dollar Weakness
This environment points toward sustained US dollar weakness, as we’ve seen the DXY index fall for five consecutive days. Any increase in market volatility from a credit scare would likely accelerate a flight to safety. This positions the Japanese yen and Swiss franc for notable gains against the dollar in the coming weeks.
While the ongoing leadership contest in Japan’s LDP is a distraction, the direction of US monetary policy will be the dominant driver for the yen. The prospect of lower US rates and a weaker dollar should continue to push the USD/JPY pair lower. We see the political uncertainty as a drag on the yen’s relative performance against other currencies, but not a reason to bet against it versus the dollar.
