Where is the dollar/yen rate heading? [Jiro Ota]
Jiro Ota Profile
Jiro Ota. FX strategist. He began FX trading in 1979 at The First National Bank of Boston Tokyo Branch. He later worked in corporate foreign exchange at Manufacturers Hanover Trust Bank, BHF Bank, National Westminster Bank, and ING Bank, then moved into retail FX, working in sales at GFT Tokyo, later gaining experience as a market strategist, and is now active as a individual investor.
※This article is a reprint/re-edit of an article from FX攻略.com January 2019 issue. Please note that the market information written in the text may differ from current market conditions.
What impact does the U.S. midterm election have on USD/JPY?
By the time you are reading this article, the results of the U.S. midterm elections should be known, and the currency market should have moved accordingly. A WSJ/NBC poll dated October 22 suggested that while Trump’s approval rating would rise in the midterms, the Democrats were expected to lead in the Congress.
While the euro and the pound are likely to be highly volatile due to political pressure, the USD/JPY pair is unlikely to move significantly unless the Republicans suffer an unthinkably large defeat in the midterms or a Lehman-like shock occurs. I estimate a 60% chance that the pair trades in a 105–120 range, a 10% chance of a stronger yen, and a 30% chance of a weaker yen.
The market consensus is that the Democrats will regain the House while the Republicans will retain a majority in the Senate. This would create a gridlock in Congress, but with opposition or presidential vetoes from Senate Republicans against Democratic proposals, major policy changes are unlikely. The probability is high that economic policies will continue as before, with limited impact on the currency market, and any yen appreciation would likely be limited to 1–2 yen.
If Democrats hold both chambers, it would be a surprise, potentially delaying deregulation or triggering concerns about economic slowdown, leading to dollar selling and a yen appreciation to around 105–108. Conversely, if Republicans control both chambers, the outcome would depend on the margin of victory, but deregulation would continue and President Trump’s authority could strengthen, leading to yen weakness and a potential move to 115–118. Additionally, if the Federal Reserve continues to raise rates, the USD/JPY could rise into the 120s.
