Risk FX Remains Bid As USD/JPY Hits 2 Year High

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Market Drivers December 27, 2012
Yen hits a two year low as Nikkei surges
Equities up helping keep high beta FX bid
Nikkei up 0.91% Europe up 0.50%
Oil $91/bbl
Gold $1658/oz.

Europe and Asia:
CHF UBS Consumption Indicator 1.23 vs. 1.30
GBP BBA Mortgage Approvals 33.6K vs. 34.6K

North America:
USD Unemployment Claims 365K 8:30
USD Consumer Confidence 70.3 10:00
USD New Home Sales 382K 10:00

Another risk on day in FX tonight with high beta currencies receiving a boost from equities as yen makes fresh two year lows against the dollar. USD/JPY rose to a high of 85.87 in early European trade as the rally in the pair continued on the assumption that the newly elected government of Shinzo Abe will pressure the BOJ to become more accommodative in its monetary policy in order to stimulate inflation and further devalue the yen.

Mr. Abe’s economic advisor Koichi Hamada stated that there were several possible policy actions that the BOJ could undertake including purchasing foreign bonds which would further depress the value of the yen through capital flows. Mr. Hamada reiterated Mr. Abe’s call for BOJ to raise its inflation target to 2-3% and reaffirmed the desire of the incoming government to have the BOJ pursue unlimited monetary policy easing in order to maintain the exchange rate a current levels. Finally Mr, Hamada stressed that the BOJ must be accountable for its policies and noting that the law that guarantees the central bank’s independence must be amended.

The relentless pressure on the BOJ of the incoming Abe administration is clearly having an impact on USD/JPY exchange rate, but it remains to be seen if Mr. Shirakawa and company will be as cooperative as Mr. Abe expects. Yesterday’s BOJ minutes suggested that the central bank was already considering easing measures even before the Abe election. However, with USD/JPY having rallied nearly 7 big figures over the past several months the BOJ may revert to its traditional conservative posture if it believes the devaluation has gone far enough.

Technically USD/JPY has become grossly overbought and therefore may be due for some correction to work off the condition. Today’s US data may present an opportunity for some profit taking if it prints worse than expectations. The North American session carries jobless claims and Consumer confidence release as well as New Home sales. The jobless numbers are expected to remain essentially the same at 365K but consumer confidence is projected to decline markedly to 70.3 from 73.7 the month prior, as the Fiscal Cliff deliberations weigh on sentiment.

If the data proves better than expected however, the push in USD/JPY could continue as shorts are squeezed through the 86.00 figure. Although the Fiscal Cliff negotiations remain at a standstill, the market continues to be unconcerned with the outcome. The latest view is that even if nothing is accomplished before the year end, the Democrats will put together a stop gap measure at the start of next year when their advantage in the Senate is more secure. For now complacency rules and if equities continue to rally in North American session high beta should follow with EURUSD eyeing the 1.3300 barrier as the day proceeds.

Boris Schlossberg
Managing Director

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