Oil Prices and the Yen: Dual Threats to Global Markets
Oil prices are reaching a critical point for US President Trump as they approach $110 per barrel, just seven and a half weeks before the midterm elections. This surge in oil prices has increased the Democrats' chances of retaking the Senate to over 50%, up from 41% in August.
Trump's statement that oil prices won't fall until after the election has reinforced market expectations of prolonged conflict, drawing attention to whether the White House will take action to bring down oil prices. The yield on the 10-year US Treasury note is also approaching 5%, narrowing policy maneuvering space.
The yen's structural shift is posing a global risk as its appreciation could trigger a systemic spike in cross-asset volatility, making it difficult for the VIX to remain at low levels. Analysts believe that large-scale capital repatriation from Japan and forced unwinding of carry trades could drive up bond yields in Europe and the US.
TS Lombard's fair-value model suggests that the yen's appropriate range is between 130-140, implying substantial upside from current levels. However, a correction in the USD/JPY exchange rate could trigger a systemic spike in cross-asset volatility, making it difficult for the VIX to remain at low levels.