The Japanese yen (JPY) has been experiencing a tumultuous period, with cross currency basis taking center stage while interest rates took a back seat. The Bank of Japan (BoJ) saw a small increase in yields this week, with OctoboJ (+2.5bp) garnering attention. Despite the uptick, it remains uncertain whether an actual hike will occur, and the desk prefers taking curve trades such as paying Oct or Jan BoJ vs being received Mar or Apr BoJ or 6m6m areas. Political headline risk continues to be a significant factor, with the team closely monitoring possible coalition government combinations. The most hawkish scenario involves the LDP and Ishin, while other scenarios are expected to be dovish. However, having a playbook handy would be crucial in determining rate movements, particularly in the long end and terminal.

Meanwhile, US regional bank woes are likely to weigh heavily on the BoJ’s mind for the upcoming October BoJ meeting, as well as cross currency basis and FX swaps on Friday. Strong widening was observed in front-end FX swaps and cross currency basis, with TN widening around 15bp, 1s FX-OIS 5bp, 3s FX-OIS 3bp, 1y cross currency about 1.75bp, and 2y cross currency about 1.5bp. The team believes that front-end FX swaps will continue to trade heavily due to USD funding concerns, but they remain cautious as these fears may subside soon, leading to a quick steepening of the curve.