The Japanese election and the Bank of Japan monetary policy meeting will place the yen in the center stage in the week ahead as traders react to the potential change in the political landscape of the world's third-largest economy and await the next move by the Japanese central bank.
In preparation for the new trading week, here is a list of the Top 10 spotlight economic events that will move the markets around the globe.
1. JPY- Japan Parliamentary Election, Sun., December 16, all day event.
Voters in Japan will take to the polls to elect 480 members of the Lower House of the Parliament, who will be given the task to form a new government. All of the latest polls forecast a majority win for the opposition - the Liberal Democratic Party and its leader, Shinzo Abe, who will be the most likely candidate to become the next Prime Minister. Mr. Abe has been very vocal about his plans for more aggressive monetary policy easing, weaker yen, targeting 2% inflation, and other methods to fight deflation and to spur economic growth. The yen has been pushed lower ahead of the election on expectations that the newly elected government will implement these measures and could remain under pressure if the election delivers the anticipated change in Japan's political landscape.
2. GBP- U.K. CPI- Consumer Price Index, the main measure of inflation preferred by the Bank of England, Tues., December 18, 4:30 am, ET.
Inflationary pressures in the U.K. are forecast to subside to 2.6% year/year in November from 2.7% y/y in October. Lower inflation should make the Bank of England policy makers more comfortable if they need to consider an expansion of the bank's Asset Purchase Program in 2013.
3. JPY- Japan Trade Balance of the difference between imports and exports, Tues., December 18, 6:50 pm, ET.
Exporters in Japan are expected to continue to feel the negative impact of the strong yen and the weaker demand from other countries with the trade deficit forecast to widen by over 800 billion yen in November compared with 620 billion in October. The alarming trend of rising trade deficit could prompt the Bank of Japan to offer additional easing at their meeting later in the week. Such expectations should weigh on the yen in the days leading to the Bank of Japan's monetary policy announcement.
4. EUR- Germany IFO Business Climate Index, a leading indicator of economic conditions measuring the outlook of businesses, Wed., December 19, 4:00 am, ET.
The business outlook in the euro-zone's largest economy is forecast to improve with an increase in the Ifo index to 102.0 in December compared with a reading of 101.4 in the previous month.
5. GBP- Bank of England Meeting Minutes, a detailed report of the bank's latest meeting containing an outlook on economic policy and economic conditions, Wed., December 19, 4:30 am, ET.
Despite of the fact that the Bank of England did not expand the size of its Asset Purchase Program, a dovish quarterly inflation and economic outlook report disproved expectations that the bank has reached the end of its quantitative easing road. The minutes would probably confirm that policy makers did not think that a change in monetary policy in December was necessary. However, this doesn't mean that the Monetary Policy Committee is not standing ready to expand the size of its QE operations if economic conditions deteriorate. The GBP could see pressures mounting, especially if the minutes remind the markets that the Bank of England's QE door is wide open.
6. USD- U.S. Housing Starts, a leading indicator of housing market activity measuring construction of new residential properties, Wed., December 19, 8:30 am, ET.
The first report in the weekly housing data sequence is forecast to show builders breaking ground on 875K units in November, less than the reading of 894K in October, while building permits inch slightly higher to 870K in November from 868K in October.
7. JPY- Bank of Japan Interest Rate Announcement, Thurs., December 20, around 12:00 am, ET.
Only a few days after an election that could result in a new government keen on forcing its central bank into aggressive monetary policy easing, the Bank of Japan policy makers will be likely to feel the pressure to do more. With an economy on the brink of another recession, the Bank of Japan once again finds itself with the difficult task to keep the yen weak and to jump-start activity in the world's third largest economy. A "shock and awe" announcement of another 15 to 20 trillion yen of QE should give further impetus to the recent decline of the yen. On the other hand, we could see unwinding of short yen positions if the Bank of Japan decides to opt for a small QE expansion or if it simply sits on the sidelines in December.
8. USD- U.S. GDP- Gross Domestic Product, the main measure of economic activity and growth in the world's largest economy, Thurs., December 20, 8:30 am, ET.
Another upward revision is expected for the final reading of the Q3 GDP with the U.S. economy forecast to grow at a faster pace by 2.8% q/a from a previous estimate of 2.7% q/a. Stronger U.S. economic growth, coupled with the recent QE expansion by the Fed and possibly one by the Bank of Japan, could boost investor sentiment, risk appetite and the higher-yielding currencies.
9. USD- U.S. Existing Home Sales, the main gauge of the condition of the U.S. housing market measuring the number of closed sales of previously constructed homes, condominiums and co-ops, Thurs., December 20, 10:00 am, ET.
As a potential new sign of a housing market recovery, sales of existing homes in the U.S. are forecast to increase to 4.84 million in November, compared with 4.79 million in October.
10. GBP- U.K. GDP- Gross Domestic Product, the main measure of economic activity and growth, Fri., December 21, 4:30 am, ET.
Growth in the U.K. in Q3 2012 is forecast to be revised lower to 0.9% quarter/quarter from the preliminary estimates of 1.0% q/q. Following three consecutive quarters of contraction, the economy has returned to growth but the report could weigh on the GBP if it increases concerns that the U.K. recovery may be taking a wrong turn, forcing the Bank of England into more easing.