Weekly Forex Outlook: Yen (JPY) Plunges to a Two and a Half Year Low

on Jan 14, 2013

The yen is off to another difficult week, declining to its lowest level in more than two years against the euro (EUR) and the dollar on January 14. The Japanese currency was dragged down by comments by the nation’s new Prime Minister Shinzo Abe who urged the Bank of Japan (BOJ) to set a medium-term inflation target. Despite gaining ground against the yen, the greenback was weak versus the single currency on account of speculation that the US Federal Reserve was in no hurry to end its bond-buying programme.

On 14 January 2013, Bloomberg reported that the yen weakened below 120 per euro for the first time in 20 months. It lost 0.7 percent to 119.88 per euro and touched 120.13, the weakest since May 2011. With the BOJ Governor Masaaki Shirakawa stepping down in April, Japan’s Prime Minister Shinzo Abe pointed out that he wanted someone who could “push through bold monetary policy” as the next BOJ governor.

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In addition, Reuters reports that Mr Abe urged the central bank to set a medium-term inflation target, in a reiteration of his calls for aggressive monetary stimulus.Reuters quotes Callum Henderson, global head of FX research for Standard Chartered Bank (LON:STAN, LON:STAC, HKG:2888), as saying: “The confirmation that there’s going to be a push for a new (BOJ) governor, that new governor is going to have a mandate of 2 percent inflation, that plus the fiscal stimulus is a major negative for the yen.”

Bloomberg reports that against the dollar, the yen dropped to as low as 89.67, a level unseen since June 2010, before trading at 89.59 as of 6:57 a.m. GMT, down 0.5 percent from last week’s close. Reuters quotes Rob Ryan, an RBS (LON:RBS, NYSE:RBS) strategist, as noting that the dollar could retreat against the yen after the BOJ’s policy meeting on January 21-22, if its policy decision is seen as disappointing. “You know the positioning is pretty stretched at this stage,” pointed out Mr Ryan, as quoted by Reuters, adding that expectations for the BOJ meeting were “sky high”.

!m[US Dollar (USD) under Pressure on Fed Policy Prospects](/uploads/story/1199/thumbs/pic1_inline.png)
The dollar was struggling with its own issues on Monday, with Bloomberg reporting that Federal Reserve Bank of Chicago President Charles Evans commented that the US should keep policy accommodative to support the economy. “Too much austerity too soon could be very damaging to near- and medium-term growth,” Mr Evans noted, adding that while lawmakers should balance a government budget, monetary policy had “an important contribution to make.”The dollar shed 0.3 percent to $1.3382 per euro and reached $1.3404, the least since February 29.

Federal Reserve Chairman Ben Bernanke is scheduled to speak at the University of Michigan on January 14, with his speech likely to influence the greenback’s performance on Monday and during the week.
Reuters notes that any signs that the US central bank is in no hurry to end its bond-purchasing programme could see the dollar soften further against higher-yielding currencies such as the Australian dollar (AUD) and the currencies of fast-growing emerging economies. On Monday, the Aussie traded 0.2 percent higher against the US dollar to $1.0556.


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