DB FX Daily: London Political Uncertainty and JPY

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FX Daily: London
Political Uncertainty and JPY
Today's Key Data and Events
EUR French PPI for Jun, +0.2% mom expected (06:45 GMT)
GBP UK net mortgage lending for Jun, GBP8.6bn expected (18:30 GMT)
EUR French unemployment for Jun , -15k expected (17:00 GMT)
JPY Japan Unemployment rate for June, 3.8% expected (23:30 GMT)

Upcoming Event Risks
Aug 3 US non-farm payrolls
Aug 7 FOMC rate decision
Aug. 8: RBA rate decision
Aug. 15: Norges Bank rate decision

LDP Suffers Heavy Losses, JPY Stays Bid
The LDP suffered heavy losses in the Japanese upper house elections on Sunday - a not totally unexpected result given the polling recently. The LDP and its partner, New Komeito, needing 64 seats to keep their majority in the upper house (where half of the 242 seats were up for grabs) won 46 seats, compared to 60 for the Democrats. The LDP alone won 37 seats. While Prime Minister Shinzo Abe has insisted he will stay in the job (and the LDP's dominant position in the more powerful lower house was not affected by the election), LDP Secretary General, Hidenao Nakagawa (not unexpectedly) resigned his post to take the blame for the result. As we argued in our preview in the 19 July FX Strategy Weekly the resignation of Nakagawa - who has been an opponent of rate hikes - could make it easier for the BoJ to increase rates. Even with this in mind though the absence of any sort of JPY weakness (however short-lived) on the back of political instability reinforces to our mind that key driver of JPY remain how the current bout of risk aversion is playing out (see chart below our JPY TWI and the S&P 500). We also continue to watch closely if a further move in JPY causes dip-buying retail players to capitulate.

Current Carry Drawdown in Context
Halfway through Monday's Asian trading session, a G10 carry basket (long NZD, AUD, GBP and short JPY, CHF, SEK) was down 4.2% from the peak reached on Wednesday. While this has reversed weeks of gains, the scale of the drawdown so far is not too exceptional by historical comparison. While there have been plenty of instances in the past 10 years where the basket has pulled back 4-5% before moving back higher, only 4 episodes have seen the a G10 carry basket push well beyond a 5% drawdown. This may provide at least some guidance in separating carry corrections within a trending market and more substantial reversals which take a year or more to recover the initial levels (see table)..

John Horner
Strategist
(+61) 2 8258 2130
[email]john.horner@db.com[/email]