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The Japanese Yen was under the spotlight last week as prime minister Noda surprised the
markets by dissolving the lower house of parliament, which will now trigger an election to be held
in December. The development raised the prospect that the next likely prime minister: Liberal
Democratic Party Leader Abe, will push for more aggressive easing by the Bank of Japan.
Meanwhile, stock markets tumbled over concerns on the U-S fiscal cliff, but such risk aversion
was not reflected in the Forex markets. Mild weakness was seen in the Aussie and Canadian
dollar but that was far from being decisive. There was still talks about uncertainty on
the Greece situation but we must note that the Euro and Swiss were indeed the strongest
currencies last week. That certainly told us markets aren't too worried about the Eurozone,
at least for the moment.
Technically, the anticipated rebound in stocks didn't happen. The DOW Jones breached the
12,500 level briefly last week, and we might see a deeper selloff ahead, before it gets
some strong support from the 12,000 psychological level. The developments might help lift the
dollar index towards the 82 level. And based on current price structures, another low in
the Euro U-S Dollar below 1.2661, and British Pound U-S Dollar below 1.5927 is likely. But
their weakness might somewhat be neutralized by buying in yen crosses. The Same could be
said in commodity currencies where U-S Dollar Canadian Dollar's strength looks tired. And
Australian Dollar U-S Dollar's fall is far from being impressive. So overall, selling
the yen will be the preferable choice. And based on anticipated weakness in stocks, long
U-S Dollar Japanese Yen is preferred to other yen crosses.
There were some positive news on the US fiscal cliff on Friday. President Obama said he had
a constructive meeting with congressional leaders and he said that everyone agreed to
"find solutions and take action as soon as possible". House speaker Boehner presented
his framework for a tax-and-spending overhaul. He sounded upbeat saying that "we've put revenue
on the table, as long as it's accompanied by significant spending cuts," and "it's going
to be incumbent on my colleagues to show the American people we're serious." Treasury Gitner
said that was a "good meeting" with "very good" tones. Gitner is optimistic that the
deal on averting the fiscal cliff is "doable within several weeks". Nonetheless, he also
urged to clear the picture sooner rather than later because of “this huge cloud of uncertainty
hanging over the economy."
The October Federal Open Market Committee minutes unveiled that policymakers discussed
several issues at the meeting, including replacing the calendar language to a data threshold
in future guidance, and implementing additional asset purchases after the expiration of Operation
Twist in December. However, no consensus was reached during the meeting and no action is
expected in December. The minutes also stated that Committee staff revised up the economic
forecasts in the near and medium term but suggesting that 'progress in reducing unemployment
over the projection period was expected to be relatively slow.
In Europe, Eurozone finance ministers agreed to grant Greece another two years, until 2016,
to lower the deficit to 2% of G-D-P target. Also the debt level is targeted to be brought
down to 120% of G-D-P until 2022. As expected, the decision to release the next tranche of
bailout funds hasn't be made. Juncker said that "a few more things have to be checked,
because not everything that was promised to be done, has been done. But these are more
minor things that can be tackled administratively and not legally." Juncker expected to have
a "definite decision" at the November 20th meeting. Also, International Monetary Fund
chief Lagarde will cut short his Asian tour to attend the Eurogroup meeting
Data from the Eurozone showed that the 17-state region is back in recession with a point 1%
quarter on quarter contraction in Q-3, following the point 2% contraction in Q2. Among the
member countries, five were in recession including Greece, Spain, Italy, Portugal and Cyprus.
Meanwhile, Germany and France only grew a mere point 2% quarter on quarter. According
to the European Central Bank's quarterly survey, economists lowerd their Q3 growth projection
to point 3%, down from point 6%. 2014 projection was lowerd to 1.3%, down from 1.4%.
The Bank of England's quarterly inflation report delivered a dovish tone on the UK's
economic outlook. It downgraded the country's economic forecasts and suggested that growth
will be "weaker for longer". The central bank anticipates annual G-D-P to expand 2% in 2
years while inflation will be at about 1.9% at the end of its forecast period. Policymakers
did not rule out further monetary easing but stated that the Monetary Policy Committee
members discussed a wide range of policies.
The Yen was broadly sold offer after current prime minister Noda said that he will dissolve
the parliament, which then happened on Friday. That triggered an election on December 16th.
It's believed that the opposition Liberal Democratic Party will be the likely winner
in the election and it will give the Bank of Japan additional pressure on policy easing.
Indeed L-D-P's leader Abe has openly said recently that the bank should continue easing
until inflation hits 3%. That's a very aggressive target considering that the central bank´s
1% inflation goal is still far from sight. Other policies that he advocates include sub-zero
interest rates and an increase in public investment.