USD/JPY Rally Relentless as 85.50 in View

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Market Drivers Dec. 26, 2012
Yen sets fresh lows as BOJ minutes reveal desire for further easing
Most EU markets still closed
Nikkei up 0.67%
Oil $88.94/bbl
Gold $1654/oz.

Europe and Asia:
JPY BOJ Monetary Policy minutes

North America
Case Shiller House Prices 9:00
Richmond Fed Manufacturing survey

Although most of the European and Commonwealth markets remained closed for Boxing day holiday, markets in Asia staged a strong rally with Shanghai index rising a whopping 2.5% as it now erased losses for the year. The positive tone in equities helped to keep risk currencies mildly bid while USDJPY continued its relentless rally hitting a fresh yearly highs at 85.45 as it inched towards the key 85.50 level in early European trade.

Investors in Asia were heartened by the latest release of the BOJ minutes which revealed that Japanese policy makers were already considering stimulus measures as early as November before the political pressure to do so by newly elected Prime Minister Shinzo Abe. The minutes of the November 19-20 meeting stated that “Some members said the central bank must act decisively, without ruling out any policy options, if the outlook for the economy and prices worsens further, or if risks heighten substantially.”

Japanese monetary policy makers were clearly concerned about the falloff in demand from China and the slowdown in Europe as key factors that were weighing on growth in the export dependent economy. Although the BOJ failed to act in November it did ease monetary policy further in December indicating that it may be more open to further stimulative actions in the new year.

The election of Mr. Abe has had a galvanizing effect on the USD/JPY exchange rate and he has been able to accomplish more in 2 months of jawboning than the BOJ has with 200B of intervention over the past several years. USD/JPY has now risen 6 big figures since he started his campaign for more accomodative monetary policy and could move towards his ultimate target of 90.00 if he continues to keep the pressure on BOJ to further loosen its stance.

With so many markets still closed for the holidays the low liquidity lackluster pace of trade should continue into North American session, but with US markets open for business activity may pick up as the day proceeds.The key question for both equity and currency markets remains the Fiscal Cliff negotiations in Congress with attention now shifting to Senate after the failure of the House to pass any compromise legislation. The concerns over the Fiscal Cliff issues have clearly taken their toll on consumer sentiment as holiday retail sales growth increased only a paltry 0.7% this year – its worst performance since 2008.

For now the markets remain relatively complacent and confident that US lawmakers will pass some sort of stop gap legislation in order to ameliorate the austerity impact of spending cuts and tax increases. However the prospect of failure remains quite real and if no solution is reached as the week comes a close the selloff in risk assets could quickly turn vicious with EURUSD dropping towards 1.3000 on any disappointment to reach a deal.

Boris Schlossberg
Managing Director

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