Weekly Forex Outlook: Yen (JPY) Plunges on LDP Victory

on Dec 17, 2012

The Japanese yen declined to its lowest level in over a year and a half versus the US dollar, after the opposition Liberal Democratic Party (LDP) won a landslide victory in line with expectations. And while the prospects for further monetary easing by the Bank of Japan (BOJ) weakened the yen, the greenback was supported by the approaching fiscal cliff deadline.

**Yen Falls to the Weakest since April 2011 vs. Dollar**
On December 17, Reuters reported that the yen slumped against the US dollar, with the greenback rising as much as ¥84.48, a level unseen since April 2011. The euro (EUR) also jumped against Japan’s currency, from ¥109.81 to as much as ¥111.43 and last traded at ¥110.53, or about 0.6 percent higher. Japan’s currency predictably weakened after the LDP surged back to power following the election on Sunday. LDP’s leader, Shinzo Abe, has called for a doubling of the BOJ’s inflation goal to two percent and unlimited easing to revive growth.

The election results mean that “the monetary policy which Abe has been advocating will become a real possibility,” commented Yuji Saito, director of the foreign-exchange department in Tokyo at Credit Agricole SA (EPA:ACA), as quoted by Bloomberg. “The market may try to weaken the yen beyond the psychological level of 85” per dollar.
The BOJ is scheduled to meet on Wednesday and Thursday, with investors expecting further monetary easing. Reuters notes that the BOJ is seen as increasing its current ¥91 trillion asset-buying and lending programme by another ¥5-10 trillion.

**Dollar Up on Fiscal Cliff Stalemate**
!m[Fiscal Cliff Uncertainty Boosting the Greenback (USD)](/uploads/story/1036/thumbs/pic1_inline.png)Reuters reports that the dollar index, which tracks the performance of the greenback against the currencies of major US trading partners, slightly edged up to 79.668. The dollar was supported by the uncertainty surrounding the US budget negotiations, which offset the impact of the decision of the US Federal Reserve to introduce additional monetary stimulus to replace its expiring “Operation Twist”.

“With the deadline in only two weeks, we expect investors to start pricing in the chance of politicians failing to agree on the fiscal cliff issues in the coming days,” commented Yuki Sakasai, a currency strategist at Barclays Plc (LON:BARC), as quoted by Bloomberg. “We continue to see a non-negligible chance of falling off the cliff at least temporarily, which would lead to an increase in safe-haven demand for the USD and JPY.”

**Kiwi (NZD), Aussie (AUD) Also Boosted by Japan’s Election**
The Australian and New Zealand currencies also surged against the yen, with the Aussie reaching its strongest level in 19 months and the kiwi rising to a four year high. Bloomberg reports that the Australian dollar touched ¥89.13, the highest since May 2, 2011, whereas the New Zealand dollar rose to ¥71.51, the strongest since October 2008.
The Aussie, however, is expected to lose some ground during the week, with the Reserve Bank of Australia (RBA) scheduled to release the minutes of its December 4 meeting when it cut its benchmark rate to three percent. “There’s still very strong demand for Aussie bonds from foreign central banks,” notes Joseph Capurso, currency strategist at Commonwealth Bank of Australia (ASX:CBA), as quoted by Bloomberg. “That’s why, when the Aussie does sell off, the selloff’s usually fairly shallow.”


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