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Article / 11 July 2016 at 8:15 GMT

FX Update: USDJPY turning up on strength of LDP election victory

Head of FX Strategy / Saxo Bank
  • Shinzo Abe wins mandate for ¥100-200 trillion stimulus splurge
  • So-called helicopter-money approach could work better than QQE
  • Dollar unable to spark despite big NFP headline figure
  • Focus on CAD as oil price back around the $45/barrel area


Shinzo Abe now has a mandate to push ahead with helicopter-money stimulus. Photo: iStock

By John J Hardy

USDJPY has surged higher from Friday’s lows (which came as a mysterious surge in JPY strength after the mixed US jobs report in what appeared to be a last ditch attempt on the 100 barrier in USDJPY ahead of the weekend elections.).

The surge is on anticipation of policy action from Japan after prime minister Shinzo Abe’s LDP won sufficient seats in the parliament to form a supermajority. That will potentially allow Abe to change Japan’s pacifist constitution – his chief political ambition.

More importantly for currency markets, the strong result for the LDP is an endorsement of more forceful political/fiscal action and points to Japan moving to the next phase of monetary policy — now that QQE is widely seen as a failure — helicopter money.

Amounts from ¥10-20 trillion are rumoured to be in play – the latter representing some 4% of Japan’s GDP. Printing money to put directly into the economy is rightly seen as having far more potential to bring back inflation than quantitative easing/asset purchases.  

Elsewhere, the US jobs report on Friday was insufficiently strong to trigger any clear implications for the US dollar, with the strong nonfarm payrolls growth accompanied with weaker-than-expected earnings growth and the unemployment rate bobbing back higher than expected to 4.9% (albeit, after an unrealistically large drop in May from 5.0% to 4.7%).

The next batch of significant US data is up this Friday, when we get a look at June retail sales, June CPI, June industrial production and the July Empire Manufacturing survey.

Elsewhere this week, some focus is on CAD after oil has broken down a bit and with the Bank of Canada out mid-week. The USDCAD chart is interesting as the zone between 1.300-1.3180+ looks a bit like a head-and-shoulders neckline. There is more anticipation this week around the Bank of England meeting on Thursday, where governor Mark Carney and company are seen as likely to cut rates as Carney more or less cheers the sterling weakening on the sidelines.

USDJPY jumps

USDJPY has jumped off the lows late last week after the Upper House elections in Japan have handed Abe’s LDP a super-majority in Parliament.

The next key objective for bulls hoping that this will turn into something bigger is perhaps the 103.50 area, though already the downtrend has been weakened by the attempt through the prior 101.40 post-Brexit and post-spike lows.

Can USDJPY stretch towards the 103.50 area?
The G-10 rundown

USD – There is little clarity after Friday’s mixed jobs numbers, though the surge in risk appetite has the market slowly pricing back in that next rate hike – with a double underline under slowly. No new inputs of note from the US data until Friday. The US political season picks up energy next week with the start of the Republican presidential campaign.

EUR – There is little to like here as we still have a negative focus on Europe’s banks amidst the surge in risk appetite (think Deutsche Bank and the Italian banks). Technically, a close below 1.1000 in EURUSD helps the bearish case.

JPY – The yen is tumbling on Japan’s upper house elections. The next critical test of the currency arrives with the BoJ meeting on July 29, while strong risk appetite is providing a headwind for the yen at the margin.

GBP – The market is anticipating a rate cut on Thursday. With markets in such a positive mood in equities to start the week, sterling may not pick up much further downside energy at the moment.

CHF – A surge in risk appetite is weighing against the franc’s fortunes and USDCHF is poking at the 200-day moving average again, with interesting trendline implications as well on that chart – upside favoured there if we hold above 0.9800.

AUD – It caught a bit of a bid overnight on the weak JPY and perhaps on Australia’s political situation clearing up after the close election result. Friday’s strong close in AUDUSD looked like a key break higher which is needed to see the levels maintained into today’s close or we have to declare the chart terminally choppy and zoom the focus out to bigger levels, like 0.7300 and 0.7800.

CAD – A huge fall in oil prices and strong risk appetite are countervailing forces for the currency – but USDCAD looks technically spring loaded for gains on a break of the 1.3100-1.3188 area. Bank of Canada is to weigh on Wednesday.

NZD – The most overvalued currency among the G10, but positive real rates and strong risk appetite are supportive for now until the Reserve Bank of New Zealand gets more aggressive. The Q2 CPI release on July 18 could prove pivotal if deflationary risks are seen as rising.

SEK – A strong resurgence in risk appetite likely is helping to keep a lid on EURSEK at the moment, as SEK looks vulnerable to negative developments in Europe (think banks/credit/growth). The latest Swedish CPI release is up tomorrow.

NOK – Oil is pressuring NOK again ahead of today’s CPI – key EURNOK resistance in 9.40-45 in play.

Upcoming economic calendar highlights (all times GMT)

  • Norway Jun. CPI (0800) 
  • Canada Jun. Housing Starts (1215) 
  • US Fed’s George (FOMC Voter) to Speak (1400) 

— Edited by Martin O'Rourke

John J Hardy is head of forex strategy at Saxo Bank

Tepord Tepord
We believe Japan is closer to introducing helicopter money than consensus believes as the tapering of its JGB purchase program forces the BoJ to seek other routes to stimulate growth. Although the BoJ could accelerate buying of asset classes, there are worries over diminishing returns. Moreover, negative interest rates on deposits is deeply unpopular amongst the banks and seems to have been ill thought out.
Tepord Tepord
‘Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated’, Milton Friedman, The Optimum Quantity of Money

‘People know that inflation erodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation’, Ben Bernanke
Tepord Tepord
‘In this sense, we continue to believe that the BoJ’s sudden policy U-turn on negative deposit rates in January was driven by the need to collapse the yield curve into negative territory as far as possible. The authorities are attempting to push bond yields down below existing nominal GDP, so that the existing debt can be converted or ‘consolidated’ into a perpetual zero coupon bond presumably before any ‘tapering announcement’’, Japan: It's Time To Launch A Zero Coupon Perpetual JGB! (II), 6th April, 2016


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