– LDP-Komeito coalition won over 320 seats; but JPY short positioning is vulnerable to a snap back…
The LDP and its ally, New Komeito, won a ‘super majority’ of over 320 seats out of the 480-member lower house in Sunday’s election. LDP took 294 seats and New Komeito party won 31 seats while DPJ got merely 56 seats, less than one-third of the 230 seats they had previously. LDP-Komeito marks the first ruling coalition since 2007 to have a two-third majority needed to enacts bills voted down by the parliament’s upper house (via. a re-vote in most matters), and hence, USDJPY rallied to a high of 84.36 at the open. However, its worth noting that with regards to the BOJ governor nomination/approval, the upper house and lower house have the same rights, implying that LDP’s Abe will still require the support from DPJ (who remains the largest party in the upper house). This hints of headwinds against market expectations that the BoJ will turn much more aggressive with respect to easing its monetary policy stance and weakening the JPY. Attention also shifts to policy talks of the next PM Abe – he needs to swiftly deliver ways to bolster the weak economy and manage the strains ties with China. But our view remains that that PM Abe is unlikely to sound and act as aggressively as he came across pre-election. As we have highlighted previously, the mainstream of the LDP is more conservative on monetary policy issues. We also believe markets are putting too much emphasis on the BoJ policy and too little on the Fed’s, especially after the latter fully delivered last week (see the latest Global FX Plus for more). In addition, given that an LDP win has been largely priced in while our positioning indicator is signalling a very heavy bearish bias on the JPY, there is scope for a further unwinds in the JPY short positions and a scale back in the USDJPY implied volatility. The BOJ monetary policy meeting this Thursday will also be important. Should policymakers only expand the balance sheet by JPY 10trn (similar to October); this could be seen as a disappointment, leading to some further squaring of JPY short exposure.
– Fiscal cliff progress to signal further EURUSD gains
The EUR ended last on a strong note last week. While ‘hard’ data remains soft, some of the survey indicators of economic activity in the eurozone have been turning less negative recently. This week brings Germany’s December IFO business confidence release on Wednesday. The number will be watched closely especially as it surprised to the upside in the previous month. Our analysis also suggests that the EUR may benefit from a positioning perspective — the overall EUR positioning had been cut back substantially between mid-September and November, but this subdued positioning looks at odds with continued improvement in sentiment (see chart below). We thus would not be surprised to see EUR-positive flows dominate on year-end window dressing (euro zone equities have far outperformed G10 peers since June). However the main uncertainty for the FX markets centres on the US ‘fiscal cliff’ negotiations. The coming days could be crucial, offering a narrow window of opportunity to get a deal before Christmas. Although the road is likely to be bumpy, we still believe US politicians will reach a deal before the year-end deadline. Positive news from the cliff talks would signal further EURUSD gains, and we maintain our 1.3300 year-end forecast.
– IMM data show significant JPY shorts and record AUD longs
IMM data suggest that the two most overextended speculative positions in the G10 are AUD longs and JPY shorts. AUD net longs rose to a record high of 103.4K contracts. While IMM positioning could slow AUDUSD gains, we still believe there is scope for further gains in the pair as other positioning indicators are less extreme. Meanwhile, speculators increased their net JPY shorts slightly to 94.4K contracts, which is a five-year high, although the 2007 all-time record peak is larger at 188K contracts. EUR net shorts were steady at 32K contracts, still suggesting plenty of scope for EUR gains. CAD net longs fell slightly to 62.5K contracts, while net GBP longs climbed to around 28K contracts.
BNP Paribas