Challenging December for the JPY

Forex News and Events

Moody’s cut Japan’s rating to A1 with stable outlook. As the Abenomics fail to achieve its fiscal targets and the delay in structural reforms weigh on the economic recovery, the successful first arrow (massive monetary stimulus) only pushes the country toward a deadlock. PM Abe’s government does not hold its promise before the BoJ, which is to proceed with fiscal reforms meanwhile the BoJ injects massive liquidity by buying its debt. The delay in the second round of sales tax hike formerly scheduled in 2015 may cost big to Abenomics, as postponed fiscal consolidation raises tensions between Kuroda and Abe. BoJ Governor Kuroda said that the impact of tax delay on inflation and growth is “the responsibility of the government”, not the BoJ’s. The discomfort between leaders is becoming an issue.

The BoJ has become the main creditor of government debt since Q1 and continues buying heavy amounts of Japanese bonds (8-10 trillion Yen per month), deepening the government’s public debt, cited among the world’s largest debt load. If now the rating companies start raising doubts on nation’s solvability, the higher risk premium on Japan’s debt, combined to weaker Yen may seriously injure the trust in Abenomics. On the other hand, a higher inflation yet moderate wage growth, is certainly not a healthy long-term combination to redress Japan on its feet. Released today, the labor cash earnings grew at the unexpectedly slower pace of 0.5% on year to October (vs. 0.8% exp. & last). One thing is sure: Japan needs fresh air.

The appetite in weaker Yen decreases, with trend and momentum indicators pointing for deeper correction this week. However, the option related bids trail comfortably above 117.85/118.00, and should give some support to USD/JPY in the coming days. The political uncertainties and gloomy economic data currently keeps the 120-resistance solid in USD/JPY walking towards December snap elections. Yet although we believe the situation is unclear on the JPY leg, Friday’s NFP numbers from the US may give a fresh push to USD/JPY. A break above 120 should run into stops while on the option markets, decent bids stand ready to sustain further upside. The USD/JPY 1-month 25-delta risk reversals stand at 37 pts, confirming the preference for USD/JPY calls. This being said, we expect the upside attempts above 120 to generate top selling opportunities before the December 14th elections. In the mid-run, we expect the PM Abe to stay in power, a scenario which could bring sustainable break above 120 once the uncertainties dissipate.

EUR/JPY steadies above its daily conversion line (147.89). The broadly EUR-short view should keep the upside limited before Thursday’s ECB meeting. A slide below the conversion line (147.36) should signal a short-term bearish reversal pattern.

AUD/JPY holds ground above 100.00 amid the broad post-RBA rally in the AUD-complex. We believe that the AUD recovery should stay temporary with rising bets on a potential RBA rate cut in the foreseeable future. The Aussie is still considered overvalued in RBA’s eyes, “lower exchange rate is likely to be needed to achieve balanced growth”. The stagnant BoJ and dovish RBA should push the AUD/JPY toward 98-100 range before fresh news out of Japan.

USD/JPY challenging the topside