Forex Outlook: Yen Falls on Hints of Early Elections

The yen fell broadly on Wednesday (14 November) extending losses against major rival currencies after Japanese Prime Minister Yoshihiko Noda said he is willing to dissolve the lower house of parliament later this week and hold elections in December.

Fxstreet.com reported that the USD/JPY pair is shooting higher ahead of London session and has broken through the 79.60 static resistance to peak in the 79.80 neighbourhood, where the 7 November low is now an area for traders to take profits for longs while some sellers take a chance to also sell on strength. Former-resistance-turned-support at 79.60 should act as an area of value to “buy on dips” as the European session progresses. The trend is set at slightly bullish. Actionforex.com suggests New Strategy of Buy at 79.50, Target: 80.50, Stop: 79.15.

Early elections are regarded as negative for the yen as the most likely victor would be the main opposition Liberal Democratic Party (LDP) and an LDP led government would probably put pressure on the Bank of Japan (BOJ) to further ease monetary policy.
“The opposition Liberal Democratic Party is likely to win the election if it happens,” opined Masafumi Yamamoto, chief foreign-exchange strategist in Tokyo at Barclays Plc. “The LDP head will then aim for higher inflation and increase pressure for the BOJ to ease further. That speculation has triggered a sell-off in the yen.”

The BOJ increased its asset-purchase programme by 11 trillion yen (£87 billion) to 66 trillion (£522 billion) on 30 October, saying the government and the central bank will make “utmost” efforts to overcome deflation. A stronger yen makes Japanese exports costly to overseas buyers and reduces the competitiveness of domestic firms, while cutting the value of income earned abroad when repatriated.

“The BOJ wants a weaker yen,” said Thomas Harr, head of Asia local markets strategy at Standard Chartered Plc Singapore. “They need to do some more to keep their momentum going.”
Shinzo Abe, the leader of the LDP, said last week that the BOJ should be trying to achieve 3 percent inflation, 2 percent higher than the inflation target set by the central bank back in February. According to analysts a new government with the opposition in power would be less committed to belt-tightening measures such as planned tax increases.

Recent Japanese polls show that support for Premier Noda’s Democratic Party has tumbled to its lowest levels since last year’s elections.
The GBP/JPY advanced in today’s early morning after trading in a broad range between 125.65 and 126.60 overnight, reaching fresh 4-week lows in the process. At 09.08 GMT the pair is trading at 127.05/06 or 0.85 percent higher, having beat the 30 October low resistance of 127.00. According to Fxstreet.com the next resistance level is at 29 October low of 127.50. Bearish movement may target support at 125.50 (21 August high) and 124.75 (11 October low).