Article / 14 December 2012 at 8:26 GMT

Japan goes to the polls; USDJPY nearing key resistance

John J Hardy John J Hardy
Head of FX Strategy / Saxo Bank

USDJPY has neared the first critical resistance area, which lies just above 84.00 as Japan goes to the polls and looks to put the LDP back into power. Will the reality of the election justify the degree of anticipatory JPY weakening?

AUD and Chinese data
The Chinese data overnight (the HSBC Flash Manufacturing PMI showing a slightly more positive 50.9 than expected and thus at a 14-month high) pulled Chinese equities sharply higher by some 4% and thus to a near 4-month high. The Aussie was one of the weakest currencies for much of yesterday as equities sold off heavily and precious metals reversed the post FOMC statement gains. It responded to the Chinese news overnight with a bit of a comeback, but failed to post new highs – a rather interesting divergence and a reminder that the currency will be very vulnerable when this bubble of complacency unwinds in the coming days/weeks. The OECD overnight said that the Aussie’s excessive strength should have the RBA cutting rates further (Australian STIRs paid no heed to this pronouncement, with the Dec. 90-day bank bill future actually selling off 7 ticks, probably in response to the enthusiasm in Chinese developments overnight)

Fitch affirms France rating
This morning, Fitch was out affirming its AAA rating of France, but placed the country’s debt on “outlook negative”. EURUSD squeezed to new recent highs overnight above 1.3100, with the high since early May of this year at 1.3172 now a stone’s throw away. Spain and Italy’s yield spreads to Germany have come back in over recent days after the recent scare. Meanwhile, those for Greece and Portugal have absolutely plummeted in the wake of the Greek buyback.

Looking ahead
The fiscal cliff negotiations appear to be going nowhere, and there is the distinct possibility that the negotiations drag on into the New Year if signs don’t materialize soon of more progress. Not sure what the Republicans think they can gain from this, and it may yet turn out that this is a mere game of chicken that will be resolved at the last moment. It really is a fascinating political tug of war: since when do you have a situation where “doing nothing” creates the most change in policy?

Japan's election
We have a key test for the JPY sell-off over the weekend as the Japanese election is now finally upon us. The polls have been very supportive for the LDP and the market is making the bet that this will offer a mandate for Abe’s promised moves on the currency. I can’t help but imagine at some point there comes some resistance to this move, as it has coincided with a bubble of complacency across markets, but there is no technical toehold on that idea at the moment, only the signs that positioning is getting more stretched and the question of how the move survives if risk appetite eases off the gas for a sustained period. The really big structural areas on the JPY cross charts are looming into view at just above 84.00 for USDJPY and 111.45 for EURJPY. It will be interesting to see if the election itself, almost regardless of the result, proves at least a short term pivot point for some consolidation.

Later today we have the US CPI, which is not likely to offer much of a challenge to the Fed’s 2.5% threshold (for core CPI) on potential policy moves, but we must remember that the FOMC’s last statement concedes more of the course of monetary policy to incoming economic data, particularly if any data surprises take us sharply in the direction of the thresholds. The recent core CPI levels have come in around 2.0% and that is also expected for today.

Economic Data Highlights

  • Japan Q4 Tankan Large Manufacturers Index out at -12 vs. -10 expected and -3 in Q3
  • Japan Q4 Tankan Non-manufacturing Index out at 4 vs. 5 expected and 8 in Q3
  • China Dec. HSBC Flash Manufacturing PMI out at 50.9 vs. 50.8 expected and 50.5 in Nov.


Upcoming Economic Calendar Highlights

  • Germany Dec. Preliminary PMI Manufacturing (0830)
  • Germany Dec. Preliminary PMI Services (0830)
  • Euro Zone Dec. Preliminary PMI Manufacturing (0900)
  • Euro Zone Dec. Preliminary PMI Services (0900)
  • Euro Zone Nov. CPI (1000)
  • Canada Nov. Manufacturing Sales (1330)
  • US CPI and CPI less Food and Energy (1330)
  • US Nov. Industrial Production and Capacity Utilization (1415)






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