Weekly Forex Outlook: Yen (JPY) Weakens on GDP Data, Bailout Decision Awaited

on Nov 12, 2012

While last week the US dollar was in the currency markets spotlight on account of the US elections, the focus is now shifting toward the yen and the euro. The yen is already off to a difficult week, with data showing that the world’s third largest economy contracted in the third quarter of 2012, at the fastest rate since the earthquake in 2011. The euro, however, is steady ahead of the meeting of the EU finance ministers who need to decide whether to grant Greece additional funding.

**Japan’s GDP Data Drags Yen Down**
On 12 November 2012, Cabinet Office data showed that Japan’s gross domestic product (GDP) fell an annualised 3.5 percent, the most since the earthquake in March 2011. The news predictably dragged Japan’s currency down, with Bloomberg reporting that the yen slid 0.2 percent to €101.26, halting three days of gains against the single currency. “We’re seeing a bit of yen selling against its crosses,” noted Lee Wai Tuck, currency strategist at Forecast Pte, as quoted by Bloomberg. “There is some concern that Japan may be falling into recession.”

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The strong Japanese currency is among the reasons cited for Japan’s weakening economy, with the yen’s appreciation making exports from Japan more expensive.
**Euro Steady Ahead of Bailout Decision**
The euro held above a two-month low in Asian markets on November 12, as reported by Reuters. The single currency’s gains however, were limited due to the impending meeting of Eurozone finance ministers, with the meeting outcome likely to set the tone for the euro. “Worries about Greece still remain, but at least some uncertainties have been removed, so we are unlikely to see a big euro selloff,” pointed out Masashi Murata, senior currency strategist at Brown Brothers Harriman, as quoted by Reuters.

Other analysts, however, seei the single currency remaining under pressure, with Bloomberg quoting Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce (TSE:CM, NYSE:CM) as saying that “all things Greek” dominated euro risk factors. “There’s residual uncertainty and the euro is going to remain under pressure.”

!m[Pressure On The Single Currency Likely To Continue ](/uploads/story/767/thumbs/pic1_inline.png)Pressure on the euro is likely to intensify on Thursday, when the Eurozone is expected to report that the economy contracted by 0.2 percent in the third quarter, extending the second quarter’s 0.2 percent contraction.
**UK Data**
As regards the pound, traders are likely to be following inflation data, with the Bank of England expected to publish a quarterly inflation report on November 14. As noted by the Financial Times, the report is not expected to contain significant changes to either the central bank’s growth forecasts, or to its inflation expectations. Last week, the BoE’s Monetary Policy Committee (MPC) voted not to expand its existing £375 billion stimulus package.

“The MPC may shift up its near-term inflation forecast but at the policy-relevant horizon, we expect the forecast to continue to show inflation undershooting the target,” noted RBC Capital’s chief European economist Jens Larsen, as quoted by the FT.
**Yuan Rises, Set for Further Appreciation**
On November 12, Bloomberg reported that China’s yuan gained the most in six weeks, with the Chinese government reporting the fastest export growth in five months. In addition, the People’s Bank of China raised its reference rate, whereas the securities regulator said that China would increase quota for its Renminbi Qualified Foreign Institutional Investor (RQFII) programme which allows yuan raised overseas to be invested in stocks and bonds in domestic markets.
“The authorities are probably feeling more comfortable with the export growth showing signs of life,” noted Jonathan Cavenagh, currency strategist at Westpac Banking Corp (ASX:WBCCD, NYSE:WBK), as quoted by Bloomberg. The RQFII expansion will encourage “more renminbi buying than otherwise would be the case. A lot of things are ticking for the renminbi today.”
Bloomberg also quoted Yu Yongding, a former adviser to the central bank as saying that the yuan would continue to face appreciation pressure although China’s current account was more or less in balance.


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