Oil prices are Trump's "big problem," while the yen is everyone's.
Two distinct risk drivers are tightening simultaneously: oil prices are fluctuating wildly under political pressure, directly threatening Trump's midterm election prospects; while the structural shift in the yen could transmit shockwaves to every major asset class through carry trade unwinding, capital repatriation , and rising global yields.
Brent crude oil prices jumped sharply on Thursday before falling back sharply on Friday, but remained near $110 a barrel with only about seven and a half weeks until the midterm elections. Since the oil price surge in August, the probability of Democrats regaining the Senate has risen from 41% to over 50%. Trump stated on Tuesday that oil prices would not fall significantly until after the midterm elections—a statement that may have reinforced market expectations of continued conflict, but also increased attention to whether the White House would be forced to take action to lower oil prices. Meanwhile, the 10-year Treasury yield approached 5%, further compressing policy maneuvering space.
A shift in the yen's direction has broader implications for global markets. The spread between US and Japanese 10-year government bond yields has narrowed significantly over the past two years, while the USD/JPY exchange rate has lagged behind this change for a long time—this divergence is now being corrected. TS Lombard believes that the return of Japanese capital is the core driver of the yen's continued strength, with their fair value model pointing to a range of 130 to 140, implying significant upside potential at current levels. Once the yen's "supertanker" accelerates its turn, large-scale unwinding of carry trades could trigger a systemic increase in cross-asset volatility, making it difficult for the VIX to maintain its current low level.
Oil Prices: Trump's Political Mathematics
Every rise in oil prices erodes the Republican Party's electoral base. Since the sharp increase in oil prices in August, the market's implied probability of the Democrats regaining the Senate has exceeded 50%. With Brent crude approaching $110 per barrel and only seven and a half weeks left until the midterm elections, the market is beginning to reassess the Republican Party's tolerance for high oil prices.
Trump's statement on Tuesday—that oil prices would only fall after the election—has somewhat reinforced expectations of continued geopolitical conflict, but this doesn't mean the White House will stand idly by. Analysts believe that if oil prices comfortably remain above $100 before the election, coupled with the 10-year Treasury yield approaching 5%, the combined political and economic pressures may force the White House to seek some form of easing. If the Democrats regain control of both the House and Senate, Trump's policy options for the remaining two years of his term will be significantly limited—a cost that may be even more difficult to bear.
It's worth noting that the market pressure reflected in current oil price volatility is far less than the smaller spot price shock in July, and even less severe than the sharp fluctuations in March. The volatility market seems to have already priced in, to some extent, the price pullback that Trump needs.
Japanese Yen: Structural Shift, Not Short-Term Disturbances
The story of the Japanese yen goes far beyond a single exchange rate fluctuation.
Over the past two years, the interest rate differential between the US and Japan has narrowed significantly, but the USD/JPY exchange rate has remained almost unchanged—this divergence is now being corrected at an accelerated pace.
TS Lombard points out that the Bank of Japan's accelerated tightening pace, increased political tolerance for yen appreciation, and a reversal of capital outflows from Japan are all contributing to the current market trend. While intervention may be a catalyst for this market movement, the return of capital is the fundamental driver that could sustain it .
TS Lombard's fair value model points to a reasonable range of 130 to 140 for USD/JPY, implying that even if it falls below 150, it may only be the beginning of this correction, and USD/JPY will face continued downward pressure.
Carry trade unwinding; yen volatility threatens global assets
The problem with the yen is not limited to Japan; it poses a threat to global markets. The logic behind carry trades is that volatility does not mask yield differentials, but as yen volatility (JPY vol) rises, the risk-adjusted return of shorting the yen is rapidly deteriorating .
Official intervention is the catalyst, while rising volatility is the core driver that transforms localized adjustments into widespread liquidation. Forced reductions in leveraged positions are directly impacting global liquidity.
Capital repatriation to Japan pushes up yields on European and American bonds.
The shift in the yen's direction is reshaping the supply and demand landscape of global bond markets. According to Natixis analysis, if the GPIF (Japan Government Pension Investment Fund) rotates funds into Japanese government bonds (JGBs), the impact will extend far beyond the Tokyo market.
Historically, Japanese investors have been significant buyers of foreign bonds. As they become more price-sensitive or begin actively repatriating funds, this will remove a crucial source of demand amid accelerating global government bond issuance . Therefore, a shift in the yen's direction could exert additional upward pressure on bond yields in the US and Europe.
A stronger yen may trigger a surge in the VIX, leading to global risk aversion.
A strong yen not only reflects global risk aversion, but it can create it itself. A disorderly decline in USD/JPY could force carry trades in global risk assets to deleverage, thus turning the yen's rebound into a broader global volatility event .
With the VIX index recently reset, stock volatility now offers a highly attractive hedging tool against this tail risk. If the yen, this "supertanker," accelerates its turn, global market volatility will no longer be able to remain dormant.
Risk warning and disclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.