A combination of political surprises in Japan and France have led to weakness in both the EUR and JPY over the past week, with market concerns over their fiscal policies/debt dynamics. This has led to a sharp upswing in DXY in the past week. This is against the dominant sell dollar macro theme evident during much of CYTD25. Also comments from Federal Reserve officials urging caution around further interest-rate cuts have also supported the recent dollar upswing. Our analysis of the French political landscape implies Lecornu’s second government will face tremendous challenges in getting the budget passed and may throw in the towel if it can’t obtain a majority for the State’s budget or the Social Security budget in the coming weeks. That would force Macron to appoint yet another PM or consider a snap election. In either of the above two scenario, we see EUR testing 1.14 levels from the current 1.16 levels. W.r.t Japan, with the exit of Komeito party from LDP coalition, Takaichi’s path to the premiership is extremely uncertain. We see two scenarios. 1. Takaichi becomes a weakened, “lame duck” prime minister, supported only by the LDP. This could lead to greater fiscal stimulus and paralysis for Bank of Japan’s policy path. 2. The opposition (CDP and allies) unites behind an alternative candidate, possibly Tamaki. This too would favor heavy fiscal measures and paralysis at the BOJ. In both scenarios Yen and JGBs lose. So, we are now neutral on JPY and believe it might be some time before we find the top in JPY some where around 155. Our original view of it testing 140 levels by Dec’25 is not valid anymore. Combining above two views, we believe economic uncertainties in both Eurozone & Japan can only accelerate further from here. This might keep Dollar bid in short term at least for Q4CY25. With Trump announcing another 100% tariff on China over and above any existing tariffs & the Xi Trump meeting unlikely at the ASEAN meet this month end in our view, risk assets globally might be under weather leading to some bid for Euro & JPY. But the resultant impact might not be enough for DXY to keep testing the crucial 99.50 levels which is the 23.6% retracement of the entire move between 110 & 96.3 for the last 1 year. Once it breaches 99.5 on a daily close basis, we can expect more upside towards 101.60.
