Weekly Forex Outlook: Yen (JPY), Euro (EUR) Fortunes Hanging on Policy Decisions

on Nov 19, 2012

With the Bank of Japan’s policy meeting ending November 20, the prospect of further monetary easing is already dragging the yen down, fuelled by speculation that the opposition party which advocates more aggressive stimulus measures will win the elections in December. In Europe, the euro edged up a bit against the yen and the US dollar on November 19, ahead of yet another meeting of the Eurozone finance ministers.

**BOJ Policy Decision, Election Speculation Weighing on the Yen**
On November 19, Reuters reported that the yen touched a seven-month low versus the US dollar, with the greenback rising as high as ¥81.59 on the trading platform EBS, its highest level since April 25. The yen also lost ground against the euro, which climbed to ¥104.15, its strongest performance against the Japanese currency in a month. As was the case last week, the yen’s downward movement was largely spurred by speculation that the Japanese Liberal Democratic Party, whose leader Shinzo Abe is known for his aggressive stance on monetary stimulus, will win the upcoming elections in December.

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“What’s going on in Japanese politics is probably a more important driver for the yen, at least in the near term, and that can see it weakening,” notes Joseph Caruso, a currency strategist at Commonwealth Bank of Australia (ASX:CBA), as quoted by Bloomberg.
Yet, the factor most likely to determine the performance of the yen is the policy meeting of the Bank of Japan, which ends on Tuesday, with Reuters quoting Gareth Berry, a UBS (NYSE:UBS) strategist as seeing the yen regaining some ground against the dollar if the BOJ refrains from announcing further monetary easing.

**The Single Currency between Agreement Hopes and Economy Concerns**
In Europe, the single currency’s weekly movements will most probably be determined by the next episode of the Greek saga, with the Eurozone ministers trying to agree with the International monetary Fund on a financing programme for Greece. Reuters reports that the euro edged up 0.1 percent to 1.2758 against the dollar after reaching $1.2661 last week.

!m[Weekly Forex Outlook, Forex, yen, euro, pound, US dollar, Australian dollar, new zealand dollar](/uploads/story/840/thumbs/pic1_inline.png)“It’s quite likely that we get some positive noise out of the finance ministers’ meeting about Greece getting a sign-off on its next tranche,” notes Mike Jones, a currency strategist at the Bank of New Zealand, as quoted by Bloomberg. “But the fundamental backdrop for the euro still isn’t favourable, given that incoming data has been quite weak.” Last week, data showed that the Eurozone gross domestic product shrank for a second consecutive quarter in the period ended September 30.

**US Housing Data to Bring the Greenback Back into the Forex Spotlight**
As for the US dollar, October data on housing starts and building permits due on Tuesday are likely to be of interest for traders, with Reuters quoting Ward McCarthy, chief financial economist at Jefferies as saying that he was confident that housing was in the early stages of a long-term rebound. “What I like about it is that it’s balanced and a gradual process, not a boom, which means it’ll probably have longer legs. Housing typically leads recoveries,” notes Mr McCarthy, as quoted by Reuters. “This time it has lagged, which means as a consequence that the recovery itself could have longer legs.”
Yet, on November 19, Bloomberg reported that the dollar weakened against 15 of its 16 major counterparts on account of speculation that the US fiscal cliff will be averted. “I am confident we can get our fiscal situation dealt with,” noted President Obama at a news conference in Bangkok, as quoted by Bloomberg.
**Aussie, Kiwi Benefitting from Risk Appetite**
President Obama’s confidence as regards the fiscal cliff aversion in turn fuelled appetite for higher-yielding assets. As a result, the Australian dollar climbed against most major peers, whereas its New Zealand counterpart maintained an advance.
“The Australian and New Zealand dollars are being bought as risk assets, so they tend to be correlated with stock moves,” notes Hideki Shibata, rates and currencies strategist at Tokai Tokyo Research Centre Co, as quoted by Bloomberg. “Amid the broader sell-off of the yen, the Aussie and kiwi are being chosen as higher-yielding currencies.”


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