While the US dollar has come back bid today, the realstory is the drop in the Japanese yen.  The yen is off almost 1% against the US dollar and nearly as much against the euro. The greenback poked through the JPY116 level, after having dipped barely and briefly through JPY114 yesterday.   For its part, the euro has bounced from JPY142 yesterday to nearly JPY144 today. 

The main driver appears to be the Japanese investors themselves.  The large government pension fund (GPIF) indicated that its diversification out of JGBs has already begun.  There seems to be many investors who are mimicking or anticipating this significant portfolio reallocation. The 4 bp rise in the 10-year JGB yield is the largest since May 2013, while the Nikkei rallied 2%, and closed above the 17,000 for the first time since 2007.  The rally was led by telecom, information technology and consumer discretionary. Energy was the only sector to have declined today.

Separately, speculation of an early election is on the rise.  According to press reports, Prime Minister Abe is contemplating calling snap elections as part of his potential decision to delay the next leg of the sales tax increase (slated to be hiked next October from 8% to 10%).  The BOJ and MOF have been reportedly pushing hard to stick to the strategy, but advisers close to Abe have vigorously argued for a postponement.   

Abe's public support has waned in recent weeks, and the cabinet reshuffle did little good.  Nevertheless a snap election would still result in a new mandate for Abe.  An election could be slated for either December 14 or the 21, according to the Yomiuri newspaper. A poll by the NHK found three-quarters of those surveyed think the tax increase should be canceled or postponed. Abe had previously indicated he would make his decision about the tax next month. Many had linked his decision to Q3 GDP figures, which are due November 16.  After contracting at an annualized rate of 7.1% in Q2, the world's second largest economy is expected to have grown around 2% in Q3.

Separately, Japan reported a larger than expected current account surplus for September.  The JPY963 bln surplus compares with expectations for a JPY538 bln surplus.  It also favorably compares with last September's surplus of almost JPY600 bln. This reflected a somewhat smaller trade deficit (BOP basis JPY714.5 bln, down from JPY831 bln), which was flattered by an 11.6% rise in exports. However, investment income account was the kicker.  It rose to JPY2.035 trillion from JPY1.152 trillion a year ago. The important take away is that although the decline in the yen may, over time, help exports, it has a nearly immediate effect on the yen-value of the income earned from overseas investments. 

Once the US dollar can establish a foothold above JPY116.00, the next target is near JPY118.00.  The JPY113.50-JPY114.00 area should now denote support.  Given the higher volatility, the upper Bollinger Band (two standard deviations above the 20-day average) which the dollar had been bumping against last week, is now near JPY117.30.  

The other notable story today is the strength of the Swedish krona. It is the strongest of the majors, gaining 0.5% against the dollar. The spur was the somewhat firmer than expected inflation report. The underlying CPI rose 0.1% for a year-over-year rate of 0.6%, this was twice the pace seen in September and a bit stronger than expected. This seems to take some pressure off the Riksbank, which, at the end of last month, brought the key rate to zero from 25 bp.  

The minutes from the meeting were released today, and now at the zero-bound, the bar seems high for additional stimulus. Several board members seemed to imply that officials need to recognize that inflation will remain below target for some time. Rather than QE or negative interest rates, it would appear the Riksbank will rely on forward guidance to shift the expectations of the first hike further out. 

The euro is trading at a three-day low against the Swedish krona, just below SEK9.18.  The next target is seen in the SEK9.1325-SEK9.15 area. Against the dollar, the euro was turned back  yesterday from brief push through the $1.25 level. The poor close in the North American session spurred follow through selling, and the euro dipped below $1.24 in the European morning.  

Last week the euro recorded cyclical lows were recorded near $1.2360.  With a limited North American session (US stock market is open, but the bond market is closed), consolidative tone ahead of the week’s important releases that start tomorrow (industrial production Wed, ECB’s survey of Professional Forecasters on Thursday, followed by GDP figures on Friday) seems the most likely scenario, and is consistent with the intra-day technical readings.