Daily Forex Outlook: Yen (JPY) Slipping to a Nine-Month Low

With the much-debated policy meeting of the US Federal Reserve now over, markets are increasingly turning their attention to the upcoming general election in Japan. The prospects of the Liberal Democratic Party’s leader Shinzo Abe becoming Japan’s next prime minister pushed the yen down to a nine-month low against the greenback on December 14. The dollar was supported by the deadlock in fiscal cliff negotiations which offset the impact of the Fed’s decision to replace its expiring “Operation Twist” with fresh purchases of Treasury securities.

**Japan Election Moving into the Spotlight**
Reuters reports that Japan’s currency slumped to a nine-month low against the greenback, which bought ¥83.85, up 0.3 percent from late US levels. The dollar, however, has risen to 83.95, a level unseen since the greenback’s peak of ¥84.187 observed in March. On December 14, the Bank of Japan (BOJ) said that its quarterly Tankan survey showed that Japanese business sentiment worsened as anticipated, which in turn boosted expectations for further monetary easing.

In addition, Japanese media reported that the LDP was set for a stunning victory in elections on Sunday, which also contributed to the yen’s plunge. “The market is growing confident the next government will be one of the most aggressive about easing that you could think of,” noted a trader at a Japanese bank, as quoted by Reuters.
Bloomberg in turn quotes Sean Callow, a senior currency strategist at Westpac Banking Corp (ASX:WBC , NYSE:WBK) as saying that the change in leadership in Japan is likely to have an impact on the BOJ. “If Abe wins a comfortable mandate, he will certainly be keen to appoint somebody who is willing to take more aggressive steps,” notes Mr Callow, as quoted by Bloomberg.

**Dollar Demand Supported**
The US dollar, which was expected to fall as a result of the Fed’s additional monetary easing, found support in the standoff in negotiations between Republicans and the White House to avert the impending tax hikes known as the fiscal cliff. The fiscal cliff is “overall tending to play risk-negative and therefore dollar-supportive,” commented Mr Callow, as quoted by Bloomberg. “Some sort of agreement to limit the fiscal hit on the US economy is still the most likely by sometime in January.”

!m[US Budget Standoff Supports The Greenback (USD)](/uploads/story/1031/thumbs/pic1_inline.png)The greenback, however, eased slightly against the euro, which was supported by the EU’s banking supervisor deal and the approval of Greece funding. Reuters reports that the single currency rose to as high as $1.3110, its highest level in more than a week and last stood at $1.3105, up 0.2 percent on the day.

**Mexican Peso (MXN) Chilean Peso (CLP) Weaken**
The standoff in US budget discussions weighed on the Mexican peso as well, since it threatened the economic outlook for Mexico’s biggest trading partner. Bloomberg reports that Mexico’s currency slid 0.5 percent to 12.8025 per US dollar, its biggest daily decline since November 8. “Until we get some resolution out of Washington we can expect to see continued intraday volatility with a bias to more profit taken on negative headlines,” noted Alejandro Silva from Silva Capital Management, as quoted by Bloomberg. “Positioning in the peso is crowded.”
The Chilean peso also lost ground on December 14, with Bloomberg reporting that Chile’s currency was dragged down by a decline in copper, another consequence of the fiscal cliff negotiations. Chile’s peso declined 0.2 percent to 475.10 per dollar at the close in Santiago. “There is uncertainty, confusion and concern in the market,” commented Cristian Donoso, a currency trader at Banchile Corredores de Bolsa, as quoted by Bloomberg. “With copper falling so fast, we should have had more depreciation, but the Chilean peso has reasons to strengthen.”