EUROPE FX: JPY Tumbles on LDP Win; U.S. Cliff Dominates The Week

Stronger-than-expected Japanese LDP victory sent USD/JPY to 20-month high while EUR/JPY gapped up at open to hit highest since March; U.S. fiscal cliff may dominate mkt attention this week.

  • EUR/USD -0.1% to $1.3154, hit $1.3190 earlier, highest since May 2, 2012
  • USD/JPY +0.5% to 83.96, hit 84.48 highest since April 12, 2011
  • EUR/JPY +0.4% to 110.37, open gapped to hit 111.32, highest since March 21, 2012
  • GBP/USD +0.1% to $1.6192, reached $1.62, highest since Oct. 5
  • EUR/GBP -0.2% to 0.8126; hit 0.8156 earlier, highest since 0.8161
  • BOTM-UFJ:
    • Stronger than expected election victory for Japan’s LDP and leader Shinzo Abe encourage JPY selling in Asian trading, Derek Halpenny, strategist at BOTM-UFJ, writes in note
    • Victory allows new govt to by-pass upper house opposition in setting new legislation; PM-elect Abe already upping pressure on BOJ before policy meeting on Dec. 20, says will work with BOJ on setting a new 2% inflation target
    • Sustained JPY selling will depend on credibility of govt’s plan to trigger shift in inflation expectations
  • Standard Bank:
    • Japan goes through prime ministers faster than Greece goes through bailout funds; mkt seems to think Abe’s LDP-led govt is different as Abe focuses on BOJ policies and JPY value, Steven Barrow, strategist at Standard Bank, writes in note
    • Another powerful rally in USD/JPY possible if BOJ goes for 2% inflation through aggressive monetary easing; anything short of this could push USD/JPY back to 75
    • Expect BOJ to do more aggresive easing; USD/JPY to rise to 90 in 2013
  • BNP:
    • EUR may benefit from positioning; overall EUR positions cut back substantially between mid-Sept and Nov; won’t be surprised to see EUR-positive flows dominate on yr-end window dressing
    • Main uncertainty for FX mkts centres on U.S. fiscal cliff; expect deal before yr-end; positive news on cliff talks could signal further EUR/USD gains; maintain $1.33 yr-end forecast
  • Citigroup:
    • NOK/SEK tailwinds may take it past recent highs; expect Riksbank to deliver 25bps cut tomorrow and forecast a stable conditional rate path; Norges Bank may leave rates unchanged despite trade-weighted NOK at all-time high in past wks, Josh O’Byrne, strategist at Citigroup, writes in note
    • USD/JPY may pull back below 83 in next 2 days as mkts digest Japanese politics; expect pair to rise early Jan. on bets for accomodative BOJ policy and concerns of JGB downgrade, Osamu Takashima, strategist at Citigroup, writes in note
    • Expect USD/JPY to peak at 85-86 in spring; downside risk limited to around 82 in 2013