The connection between the yen and the power handover in Japan continues to dominate sentiment in Asia, with the latter causing ongoing weakness in the former. Since Abe and his cabinet were officially sworn in earlier this week, the yen has been on the back foot. Yen traders are clearly concerned that Abe will live up to his pre and post-election promises.
Abe continues to drive the yen lower
The promises made by the LDP could have severe implications for fiscal and monetary policy in Japan and, in turn, the yen, largely because of Abe’s comprehensive election win which gives his party ultimate power over what legislation gets through the houses of the Diet. Of particular interest for the market is the current drive from Abe and some of his cohorts in Tokyo for a rewriting of the Bank of Japan act, which gives the bank independence from the government. If the BoJ were to lose its independence and the government were to gain effective control of the BoJ, then Tokyo could force the bank to follow its extremely dovish path, ultimately leading to much more aggressive easing from the BoJ. The threat to use legislature to remove the bank’s independence comes after the BoJ failed to implement the government proposed 2% inflation target, now Tokyo has given the bank until its next meeting in January to do this.
USDJPY initially found some resistance around 85.70, before continuing its seemingly unstoppable march higher. Looking ahead, we cannot see a complete reversal in the yen’s trajectory, at least not in the sort-term. However, downside may be limited for JPY if it appears fiscal cliff talks in the US aren’t progressing. The question is which force is more powerful? Right now, with the US looking like it has approximately another two months to find a solution and with the extreme dovishness coming out of Tokyo, it appears JPY downside may hold the upper hand.
Geithner extends the fiscal cliff deadline by around two-months
US Treasury Secretary Geithner said overnight that the US will begin using extraordinary measures to delay falling off the fiscal cliff, something the market broadly expected the US to do. These measures however, are only short-term. In other words, they can only keep the US afloat for around 2 months, although Geithner warned it is impossible to predict the duration of these special measures given the uncertainty over tax and spending measures that make-up the impending fiscal cliff. Politicians in the US will return to the negotiating table tomorrow, after taking some time off during the holiday period.
Monti meets with his partners
In Europe, US fiscal cliff trepidations are hovering over the market, although investors also have their attention on upcoming elections in Italy. Mario Monti, who was appointed a technocrat PM 13 months ago, appears to gaining support, partly due to his 25-page manifesto entitled “Change Italy. Reform Europe”. The current PM is expected to hold talks today with prospective collation partners to discuss strategy and candidate lists. Nonetheless, the centre-left Democratic Party, under Bersani, appears to hold a firm majority leading up to the election in February.
It is a very quiet night on the data front in Europe, with only BBA mortgage approvals for the UK and the UBS Swiss Consumption Index. Nonetheless, the focus will be on unemployment claims figures and consumer confidence data out the US.
USDJPY – hourly