Dollar-Yen May Test 160 Next Week as U.S. CPI Battles AI Stock Slump; BOJ December Rate Hike Bets Also in Focus

This week, the dollar-yen passed through two major events—the U.S. midterm elections and U.S. employment data—and the dollar climbed to the mid-158 level on the back of strong U.S. labor indicators. At the start of the week on the 2nd, President Trump's stance of not rushing to resume attacks on Iran spread expectations of easing Middle East tensions, and with crude oil prices and U.S. long-term interest rates falling, dollar selling prevailed and the pair dropped to 157.63. On the 3rd, U.S. September JOLTS job openings hit a four-month high, bringing additional rate hike expectations for this year into focus, and the pair rose to 158.77.

On the 4th, following results showing a landslide Democratic victory in the U.S. midterm elections, the pair fell to the mid-157 level during Tokyo hours, but was bought back to 158.67 on an upside surprise in the U.S. October ADP employment report and a narrowing of the September trade deficit. On the 5th, U.S. initial jobless claims fell to a 57-year low and the pair rose to 158.50, but concerns over the profitability of AI-related investment and vigilance over regulation tightening led by Democrats pushed tech stocks lower, and risk-averse yen buying drove the pair down to 157.54.

At the weekend on the 6th, Asian stocks slumped across the board, with the Nikkei Stock Average briefly falling more than 4,300 points, keeping the pair heavy. However, the U.S. October employment report released during New York hours showed nonfarm payrolls rising 165,000, far exceeding the market forecast of 65,000, and the unemployment rate fell to 4.1%. On strengthening expectations for additional Fed rate hikes this year, the pair rose to 158.58. It then fell back to 158.00 on lower inflation expectations but was bought again, ending at 158.50. The 200-day moving average (around 158.60) is seen as resistance, while the resilience of U.S. employment supports the downside.

Note: Schedule is based on Japan time. Market forecast for CPI is +0.3% month-on-month (September +0.6%), with the core index at +0.2% (+0.3%). PPI accelerated to +1.3% month-on-month in September from +0.5% in August, and the core index also rose +0.7%, indicating strong inflationary pressure.

The biggest focus next week is the U.S. October CPI on the 10th. If the result exceeds market expectations, it would indicate continued inflationary pressure and serve as a dollar-buying factor on Fed tightening expectations. The PPI on the 13th would similarly support expectations for a December Fed rate hike if it comes in above forecast. The Fed has kept its policy rate at 3.75-4.00%, but the market is beginning to factor in the possibility of additional rate hikes.

Meanwhile, vigilance over tighter regulation of data center construction following Democrats' recapture of both chambers means that if selling intensifies in tech stocks, risk-averse yen buying could continue. In the U.S. market on the 5th, the Philadelphia Semiconductor Index (SOX Index) fell about 12%, and the Nasdaq-100 Index dropped 6.4%. This trend spilled over into the Japanese market, and on the 6th the Nikkei Stock Average briefly fell more than 4,000 points, breaking below the milestone 60,000 level. The risk-sensitive Australian dollar was sold while the yen was bought in some scenes, showing that declining investor risk appetite is spilling over into the FX market.

On the Japanese side, fading expectations for a BOJ December rate hike in the wake of the stock market plunge is likely to weigh on the yen. The BOJ kept its policy rate at 1.25% at its October 30 monetary policy meeting, but indicated its judgment that the underlying inflation rate has reached a level broadly consistent with its 2% price stability target. However, if AI data center construction regulations slow related investment, it would put downward pressure on the Japanese economy through deteriorating earnings at Japanese semiconductor-related companies, and prolonged stock weakness would inevitably worsen household and corporate sentiment. Under such circumstances, views that the BOJ will become cautious about rate hikes would spread, and if expectations for narrowing U.S.-Japan interest rate differentials weaken, that would be a yen-weakening/dollar-strengthening factor. That said, many point out that the BOJ maintains its policy of adjusting monetary easing and would not reverse course solely because of stock price declines.

Next week's forecast range is 155.00-160.00. Key upside levels are 159.50 and 160.30, while downside levels are 154.90 and 151.90. Dollar-buying factors include the Fed's policy rate hold and additional rate hike expectations, concerns over Japan's fiscal deterioration, vigilance over a resurgence of U.S. inflation from Middle East tensions and higher crude oil, and dollar buying on the back of U.S.-Japan interest rate differentials. Conversely, dollar-selling factors include the BOJ's rate hike to 1.25% and additional rate hike expectations, vigilance over currency intervention by Japanese and U.S. authorities, and concerns over fiscal deterioration from U.S. debt outstanding surpassing $40 trillion (approximately ¥6,337 trillion).

Within the Trump administration, some analysts attribute the midterm election defeat to the attacks on Iran, and the political situation in Israel, a U.S. partner, is also becoming unstable. If concerns over Middle East geopolitical risk subside and crude oil prices continue to fall, that could become a dollar-selling factor through weakening inflationary pressure. Expectations that congressional oversight of the Trump administration will strengthen and political pressure on monetary policy will weaken are also seen as a dollar-supportive factor.

Stock market trends will continue to sway the yen. Whether the decline in AI-related stocks runs its course or expectations for a BOJ December rate hike recede further will likely be key points determining direction. Among market participants, the prevailing view is that the resilience of U.S. employment supports the dollar's downside, while the pair's upside will become heavy on intervention vigilance as it approaches 160.