The USD/JPY and Japanese elections remain the main story this morning as we begin the week before Christmas. The JPY fell quickly as Asian Markets opened Sunday night, moving to highs above 84 before profit takers emerged. The JPY is lower against all the cross currencies.
To recap, the Liberal Democratic Party (LDP), as was expected, returned to power with a resounding victory winning 294 out of the 480 seats in the lower house. When combined with the Komeito party, the coalition government will maintain 325 seats, more than two thirds.
In comments following the victory, the new Prime Minister Shinzo Abe has reiterated that his top priority will be “economic recovery and battling deflationâ€. He is already on the record for calling for the Bank of Japan to begin unlimited easing. The BOJ will hold it’s last meeting of 2012 this week and is expected to add another 5-10 trillion JPY to it’s 91 trillion JPY asset purchase and lending program. Many believe that after the new year there will be more announcements from the BOJ regarding easing. One move that PM Abe is expected to make will be the replacement of Masaaki Shirakawa as head of the BOJ when his term ends in April.
Technically, the pressure remains on the JPY as market analysts look for an eventual test of 85.50, which is a long term resistance level. In other cross currencies, the EUR/JPY has moved above the 110 level, which many considered to be a strong psychological resistance area, and the target here is 111.40.
Looking at the other currencies, the EUR begins this week trading in the mid 1.31 area. The overnight range was pretty quiet as would be expected for this time of the year. The pressure on the JPY is helping keep the EUR bid and while this week has very few economic releases, traders will have their eyes on a speech ECB President Draghi is expected to make in Brussels today. He will be testifying about the economy at the quarterly hearing of the Committee on Economic and Monetary Affairs. It should be noted the last time that President Draghi made a speech like this he spoke of the problems in the Eurozone and this created a sell off in the EUR. Current support is at 1.3130, while resistance appears at the 1.3190 area.
Congress and the President return to negotiations on the Fiscal Cliff today and there was a report over the weekend that House Speaker Boehner made a new proposal that included raising taxes on the wealthiest people in the US. His proposal would raise one trillion dollars in tax revenues over the next 10 years. A Democratic spokesman described this move as a “breakthrough†in negotiations. Expect negotiations to intensify this week, as leaders want to get this deal done by Christmas.
The latest report on positions show that net EUR shorts remained relatively unchanged at 31,600 contracts for the week ending December 11. JPY shorts moved higher to 94,400, while GBP long positions remained the same at 28,000. AUD long positions made another 2012 high at 103,400, while the CAD longs rose to 62,500.
This is usually a very quiet trading week. Most trading rooms are pretty much done for the year and “skeleton†crews man the trading desks, with most traders off on holiday. This tends to create liquidity problems and I am sure this year will be the same as others. Less liquidity tends to produce erratic market moves and that won’t be surprising if it happens. Look for the EUR to remain bid through the Draghi speech. His remarks may determine this week’s EUR direction.
