Yakety Yak

September 22, 2025

Elias Haddad

No major data today but loads of central bank speakers. Markets trading cautiously. Stocks and bonds are down slightly while USD is mixed.

Japan’s LDP leadership race kicked off today. We see room for USD/JPY to edge down regardless of the election outcome.

RBA Governor Michele Bullock leaned against an aggressive easing cycle.

In our Drivers for the Week report we dive into the latest Fed decision and unpack why a more dovish pivot is likely.

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USD is consolidating recent gains. USD will likely trade firmer this week before settling into its August range as US-G6 yield spreads show little scope to move further against USD. Beyond the near-term, the USD fundamental downtrend is intact. There are no policy-relevant economic data releases today, but numerous central bank policymakers are scheduled to speak. Fed: Williams, Musalem, Hammack, Barkin and Miran. ECB: Lane. BOE: Pill and Bailey.

JAPAN

USD/JPY is holding under its 200-day moving average (148.62). Japan’s Liberal Democratic Party (LDP) leadership race kicked off today, with the election set for October 4. The winner of the election will be the next prime minister. The five contenders are:

(i) Sanae Takaichi. Opposes BOJ rate hikes and advocates for higher government spending. JPY and JGB negative.

(ii) Shinjiro Koizumi. Not opposed to BOJ normalizing rates. Wants a combination of fiscal stimulus and structural reforms. JPY and JGB neutral.

(iii) Toshimitsu Motegi. Backs BOJ rate-hike strategy. Supports target fiscal stimulus rather than populist giveaways. JPY and JGB positive.

(iv) Yoshimasa Hayashi. Backs BOJ rate-hike strategy and ruled out the need for large-scale stimulus. JPY and JGB positive.

(v) Yakayuki Kobayashi. Monetary stance not clearly defined. Growth-focused fiscal approach. JPY and JGB neutral.

A Mainichi Shimbun nationwide opinion poll conducted on September 20-21 showed Takaichi with the highest support at 25%, followed by Koizumi at 21%, Hayashi at 10%, Motegi at 3%, and Kobayashi at 2%. However, Koizumi is favored over Takaichi among LDP member and supporters (who have voting power in the party election).

Whoever is the next prime minister faces deep legislative gridlock as the LDP does not have majorities in both bouse of parliament. Some LDP contenders may campaign on fiscally profligate pledges but pushing them through parliament will be difficult.

Beyond the election uncertainty, we see room for USD/JPY to edge down towards the lower-end of its multi-month 140.00-150.00 range as it’s trading well-above the level implied by US-Japan 2-year bond yield spreads. Our base case is for the Bank of Japan (BOJ) to resume normalizing rates at the next October 29-30 meeting. The swaps market price-in 50% odds of a rate increase at that meeting.

AUSTRALIA

AUD/USD is trading on the defensive after breaking key support at 0.6600. RBA Governor Michele Bullock downplayed prospects of rate cuts beyond what markets already price-in. Bullock pointed out that inflation is now within the 2–3% target range and “while labour market conditions have eased a little since we last met [August 12]…we assess that some tightness remains.”

The RBA is widely expected to keep the policy rate at 3.60% at its next meeting on September 30. Over the next 12-month, RBA cash rate futures continue to imply nearly 50bps of easing and the policy rate to bottom at 3.10%. Investors should look to accumulate AUD/USD on weakness near 0.6500. The RBA is on track to ease more cautiously than the Fed and global economic activity is resilient.

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