The Japanese yen closed last week trading in the proximity of 82.30 per USD 100, a level not seen since April. This is after retracing some ground in the aftermath of the surge to almost 83.00 during the middle of the week. Furthermore, the impressive rally of USD/JPY can trace its genesis to the beginning of the second half of November, when the psychological mark at 80.00 was still a dream for yen bears.
…It's the risk… and the politics!
Better-than-expected U.S. data plus hopes of a deal on the next tranche of the financial aid directed to Greece, worth up to €44 billion, were last week adding to the risk sentiment in detriment of safe haven inflows. This although the later disappointment after the first EU finance ministers' gathering brought in an ephemeral knee-jerk reaction in the demand for the risk-associated assets. However, the presence of risk aversion in the markets was far from guaranteed. A new wave of risk appetite soon followed, after the market participants rapidly shifted their focus of attention on today's second EcoFin meeting, with promises to get over the technicalities that have impeded Greece to secure those most needed funds. At the same time, the wider context in the eurozone was pointing to a decline in the economic activity in the fourth quarter, after November eurozone preliminary PMI prints were still well into contraction territory.
In the political arena, the LDP candidate Shinzo Abe has published his policy platform ahead of the December elections, where polls would be proclaiming him as the next prime minister, with the LDP thus controlling both houses of the Parliament. Abe's position towards a weaker yen is well-known and his late disagreements with the BoJ regarding the measures to tackle the entrenched deflation. According to the LDP, the inflation target must be around 2-3%, higher than the actual 1.0%.
In addition, the last figures of the Japanese trade balance have shown a wider deficit of ¥549 billion during October, and a worrisome decline in exports. Therefore, Japanese exporters have now lost more power in order to support the yen via FX selling.
And last, M.Shirakawa's term will finish in April, and Abe's plans include a definitely dovish candidate to command the Bank of Japan.
… So what's next?
Having said that, it seems easy to conclude that further weakness lies ahead for the Japanese yen. According to Mansoor Mohi-uddin, Managing Director of Foreign Exchange Strategy at the Swiss bank UBS, pullbacks in USD/JPY represent an opportunity for buyers towards the bank's target at 85.00 in the medium term.
Ahead in the week, the release of Japan's inflation figures for October would be key, as a continuation of the deflationary trends would surely add extra pressure to the BoJ.