A robust September US jobs report highlights the strength of the US economy, likely keeping the USD supported ahead of the upcoming US election. Meanwhile, dovish remarks from Japan's new Prime Minister and BoJ Governor Ueda suggest that further rate hikes are not imminent, adding pressure on the JPY and potentially reigniting carry trades again.

USD: Strong Job Reports

Fed Chair Powell's latest comments indicate that the Fed is not in a hurry to cut rates. The recent 50bps cut reflects confidence in maintaining labor market strength while adjusting policy. He stressed that any future rate cuts would be gradual, data-dependent, and could include two more 25bps cuts by year-end. Following his remarks, markets have dialed back expectations for a 50bps cut in November. The September jobs report, which beat expectations came in at 254K jobs compared to August's 159K further solidified this view. Unemployment also fell to 4.1%, the lowest since March, reinforcing the idea that a 50bps cut in November is unlikely, even if October's report disappoints. 

Additionally, geopolitical tensions in the Middle East are fueling risk aversion, enhancing the safe-haven appeal of the USD. Growing uncertainty around the upcoming U.S. presidential election could further support the USD, reviving the so-called 'Trump trade.' Looking ahead, markets will focus on the FOMC minutes and the September CPI report. With Powell's recent comments and strong jobs data, no surprises are expected in the minutes, and Powell may reaffirm the Fed’s dual mandate alongside the possibility of two more rate cuts this year. September CPI is expected to rise +0.1% M/M in September, down from +0.2%, while core CPI may ease to +0.2% from +0.3%. As the Fed shifts its focus to the labor market rather than inflation, any inflation uptick is unlikely to alter their outlook for further cuts. Overall, domestic developments and ongoing Middle East tensions are likely to support the USD for now.

JPY: Dovish BoJ and New PM

Shigeru Ishiba's surprise victory in the LDP Presidential election initially boosted the JPY, but investors are increasingly uncertain about how quickly, if at all, he will shift away from Abenomics. Following his meeting with BoJ Governor Kazuo Ueda, Ishiba stated that now is not the right time for a rate hike. As a result, the “Ishiba trade” in USD/JPY has largely unwound. In the near term, JPY’s direction will be influenced by US economic data, particularly the September CPI.

Additionally, USD/JPY’s strong positive correlation with global equities means China's return from the Golden Week holiday, the re-opening of Chinese equities, and holiday spending will be key drivers for JPY. With no imminent BoJ rate hike according to Ueda and reinforced by new PM Ishiba, JPY may remain under pressure, potentially reigniting carry trades. Any stronger-than-expected US data, especially after last week's robust labor report, could weigh further on JPY as recession risks in the US diminish.