USDJPY Breaches 81.00
USDJPY continued its ascendency from the Asia session after the leader of Japan’s main opposition party again expressed a preference for a weaker yen, to be achieved via much looser BoJ monetary policy. We’ve heard such comments repeatedly over the past two months, but Abe’s views on economic policy have acquired a greater resonance since Prime Minister Noda set a date for a general election yesterday. US yields meanwhile remain depressed and threaten to go lower still as the US fiscal cliff approaches. Add the prospect of more action from the Fed in the form of outright balance sheet expansion heading into year-end, and a case for an even stronger surge will weaken further. Yesterday’s FOMC minutes release would have opened the door for the Fed to return to outright Treasury purchases to compensate for the end of Operation Twist, and our economists also note that the minutes also reflected the ongoing debate about the use of unemployment/inflation targets as policy indicators. San Francisco Fed Chairman Williams was very clear on this in comments made overnight, but indicated the Fed is ‘grappling’ with this direction for policy and the Fed may not be ready to take such a step in the near term. If execution of policy remains one of using the Fed’s own balance sheet and transmitted via lower borrowing costs, the dynamic will ultimately set a limit on how high USDJPY can go, but for now political developments in Japan have become the dominant driver and could remain so for another few days. So we would be reluctant to stand in the way of this upward momentum for now – especially with the next BoJ policy decision only days away (on Nov. 20). However, USDJPY upside should not be mistaken for a risk on environment as overnight most European indices were still trading on a negative tone, probably in anticipation of more risk aversion coming from the US ahead. President Obama made clear his desire to allow Bush-era tax cuts to expire in January, and said that the US could succumb to the fiscal cliff due to what he called Republican political ‘stubbornness’. Meanwhile, back in Europe the economic indicators were also bleak as Q3 GDP (advance) came in at -0.1%q/q, though CPI was broadly in line with expectations. In Germany, Q3 GDP came in at 0.2%q/q, higher than expected (0.1%q/q), but these figures will be hard to replicate next year and we see 0.1%y/y expansion for the Eurozone for the entire year. Ahead today, Fed Chairman Bernanke will be on the wires at 13:20 ET and US jobless claims are due. EURUSD traded in a range of 1.2718-1.2779 and USDJPY 80.13-81.24.
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