Daily Forex Outlook: Yen (JPY) Climbs as BOJ Eases but Keeps Inflation Target

on Dec 20, 2012
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The yen regained ground on December 20, snapping a three-day decline versus the US dollar, with the Bank of Japan expanding its asset-purchasing programme for the third time in four months. The BOJ, however, kept its inflation target unchanged for the time being, despite the calls of Japan’s incoming Prime Minister Shinzo Abe for doubling the goal. The yen was also supported by renewed tension over the US fiscal cliff talks which boosted haven currencies and sent the greenback higher against the euro.

**Yen Climbs against Majors after BOJ Meeting**
On December 20, Bloomberg reported that the yen climbed against all of its major peers, strengthening 0.6 percent to 111.02 per euro at 6:33 a.m. GMT. The yen also snapped a three-day decline versus the US dollar, and rose 0.5 percent to trade at 84 per dollar.
In recent weeks, the yen has been under a continuous pressure on account of speculation of further monetary easing by the BOJ. And while Japan’s central bank did not disappoint and expanded its asset-purchasing programme by ¥10 trillion (£73 billion) to ¥76 trillion (£556 billion), the move was broadly expected by the market.

“Investors might have wanted to hear more details on the inflation target from the BOJ, pushing the yen higher,” noted Masafumi Yamamoto, chief foreign-exchange strategist at Barclays Plc (LON:BARC, NYSE:BSC), as quoted by Bloomberg. “The policy decision itself came in line with expectations.” In its statement, the BOJ signalled that it may reconsider its inflation objectives at its next policy meeting in January 2013.

“The BOJ showed caution by failing to respond to Abe’s request immediately,” noted Hideo Komano, chief economist at Dai-Ichi Life Research Institute, as quoted by Bloomberg. “The bank has been clear that it can’t beat deflation on its own. It’s still unclear how it will respond to the government’s requests.”
**Fiscal Cliff Tension Boosts Haven Currencies**

The yen was also supported by demand for safe haven currencies on account of tension over the fiscal cliff negotiations in the US. Reuters reports that the Republicans announced plans to put another tax plan up for a vote, prompting President Barack Obama to threaten to veto it.
The news supported the US dollar, which climbed versus the euro, with the single currency slipping from an eight month high of $1.33085 reached on Wednesday. As reported by Bloomberg, the euro lost 0.1 percent to the greenback to $1.3216 per dollar, after falling as much as 0.3 percent earlier. The dollar index, which over the last few days lost 0.4 percent, climbed 0.1 percent to 79.345.

“The lack of traction in concluding any agreement leaves a limited amount of time before year end, with markets likely to become more nervous by the day,” noted Mitul Kotecha, head of currency strategy at Credit Agricole SA (EPA:ACA), as quoted by Bloomberg. “This could still threaten the solid rally in risk assets registered over recent weeks.”
**Mexico’s Peso (MXN) Declines on US Budget Concern**
The lack of progress in US budget talks weighed on the Mexican peso, which depreciated 0.4 percent against the dollar to 12.7664, as reported by Bloomberg. With the US being Mexico’s biggest trading partner, concerns over the US economy usually drag the peso down. “Until they finalise a deal, there’s going to be this cloud of uncertainty of how the US economy will react to any fiscal adjustment,” commented Italo Lombardi, an economist at Standard Chartered Bank (LON:STAN, LON:STAC, HKG:2888), as quoted by Bloomberg. “And this obviously impacts Mexico.”

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