This weekend’s landslide election victory for the Japanese LDP could well be the precursor to a much more interventionist policy with respect to monetary policy from the new Japanese government.
The nature of this weekend’s victory makes it much more likely that the new incumbent Shinzo Abe will be able to follow through on his pledges, pre-election to push the Bank of Japan to be much more aggressive in its policies to fight deflation, and promote economic growth.
Part of the LDP’s election manifesto was the setting of a clear inflation target of 2% and to work towards that by means of aggressive monetary easing with the help of the Bank of Japan.
With the US Federal Reserve already in full easing mode it seems likely that to make a dent in the high value of the yen the Bank of Japan will have to be much more aggressive than it currently has been in stemming the yen’s strength.
Last week’s recent decline in the yen reflects this new political climate and this weekend’s events confirm it, which suggests that with the continued weakness in Japanese economic fundamentals, the Bank of Japan will soon become much more assertive.
With that in mind we could get some clues with respect to the direction of travel on further stimulus measures as early as this Thursday’s monthly rate meeting.
Away from Japan and back in the US attention remains firmly focussed on the discussions between Republicans and Democrats on the US fiscal cliff, with pressure increasing on Republican House leader John Boehner to soften his stance on higher taxes. There does appear some evidence that he is starting to lean this way after he suggested raising taxes for incomes over $1m.
Whether it will be enough to speed up a deal is open to debate, given the small amount of extra money it will raise, however it does suggest the Republicans stance is starting to weaken as the cliff deadline approaches, given the lack of support nationally their current stance appears to have.
In Europe ECB President Draghi is scheduled to speak to the European Parliament about the latest goings-on in Europe and what he would like to see from politicians in the wake of the recent slide in bond yields as a result of actions by the ECB to calm financial markets.
EURUSD – closing at its highest levels since May and posting its biggest weekly gain since September, a close beyond 1.3170 opens up a move towards 1.3490. 1.3170 also happens to be 38.2% retracement of the 1.4940/1.2045 down move.
It needs a move back below 1.3020 to retarget the key support at the 1.2880/90 level which is the 50% retracement of the up move from 1.2660 to last week’s high at 1.3125.
A move below the 1.2880 level opens up a move back towards the trend line support from the 1.2050 low, which now sits at 1.2825, and the 200 day MA at 1.2790.
GBPUSD – a close beyond 1.6180 and the November highs remains the key resistance blocking a move towards 1.6310. Trend line support from the 1.5830 lows now comes in at 1.6070, while the key support remains at 1.5980. Only a break through here targets major trend line support at 1.5875 from the 1.5270 lows, the 200 day MA at 1.5870 as well as 1.5660.
EURGBP – Friday’s break beyond 0.8130 brings the November highs at 0.8165 into view with a break targeting the 0.8300 level at the very least. The 0.8080 level needs to hold for this move to unfold otherwise we’re probably heading back towards 0.8030 and trend line support from the July lows at 0.7755 which remains the key level for the uptrend to continue.
USDJPY – the gap higher above the 84.15 level in early Asia marks the highest level for the US dollar in over 18 months in the wake of the weekend elections in Japan, targeting a move towards the 2011 highs at 85.55.
The previous resistance at 82.70/80 should now act as support, but if we do drop below this then there remains solid support at 81.70. If we break below 81.60 then the potential is there for a move towards 80.50, and even 79.90.