Daily Forex Outlook: BOJ Policy Meeting Prospects Dragging Yen (JPY) Down

on Dec 19, 2012

With the Bank of Japan (BOJ) starting a two-day policy meeting on December 19, the yen was dragged down by expectations for further stimulus. Reuters reports that Japan’s currency, which this week already posted a 20-month low against the dollar, declined to a 16-month low against the euro. The euro for its part benefitted from the progress made in US budget talks.

**Yen Down vs. Dollar, Euro on Easing Speculation**
As reported by Reuters, the euro hit its strongest level against the yen since August 2011, rising as high as ¥111.78. The yen also declined versus the greenback, which advanced 0.2 percent to trade at ¥84.35. The yen yet again suffered from speculation of additional stimulus by the BOJ, which started its policy meeting today, with a policy announcement expected on December 20.

“We’ve seen renewed interest in dollar/yen,” noted Jesper Bargmann, Asia head of G11 spot FX for RBS (LON:RBS), as quoted by Reuters, adding that there were continued expectations that a new Japanese government would keep putting pressure on the BOJ. “There are some expectations that something related to an inflation target might come out.” On December 18, Shinzo Abe, the leader of Liberal Democratic Party (LDP) which won the general election in Japan, called for a two percent inflation target, with the current goal being one percent.

**Euro Extends Fiscal Cliff Gains**
The single currency is off to a strong start of the day, with Bloomberg reporting that the euro extended gains against the greenback for an eighth consecutive day, reaching a seven-month high. Optimism related to the US fiscal cliff underpinned the euro’s upward movement, sending it 0.1 percent higher to $1.3243 after earlier reaching $1.3256, the most since May 1.

!m[Fiscal Cliff Progress Weighs On The Dollar (USD), Boosts Euro (EUR)](/uploads/story/1058/thumbs/pic1_inline.png)
The dollar index, which follows the movements of the greenback against a basket of currencies, touched a two-month low on speculation that US policy makers will manage to reach a deal to avert the looming fiscal cliff.
**Kiwi (NZD), Aussie (AUD) Decline**

Although fiscal cliff optimism tends to spur appetite for riskier assets, the Australian and the New Zealand dollar, both considered higher-yielding currencies, declined on December 19. Bloomberg reports that the Aussie fell against most of its 16 major counterparts, declining 0.2 percent against the US dollar to $1.0515, having lost 0.3 percent in the previous two days. The kiwi gave up 0.3 percent, to trade at 83.94 US cents, and lost 0.2 percent to ¥70.74.
The Australian dollar has been dragged down this week by the December 4 policy meeting minutes released by the Reserve Bank of Australia (RBA). In addition, the RBA governor Glenn Stevens was reported as saying that there might not be a seamless “handover” from mining to other drivers of growth.
“Governor Stevens has always been worried about the output gap and what is going to fill the void when mining investment slows,” said Hans Kunnen, an economist at St. George Bank Ltd, as quoted by Bloomberg. “The fact that the RBA has come out and said economic growth in Australia would be slower may have dampened enthusiasm toward the Australian dollar.”
The New Zealand dollar on the other hand declined mostly on expectations that domestic economic data scheduled to be released tomorrow, will show a slowdown in the country’s growth.


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