Forex Flash: Dollar down ahead of FOMC – BTMU (Barcelona) - Derek Halpenny, European head of Global Markets Strategy at the Bank of Tokyo Mitsubishi UFJ notes that the FX market has been relatively quiet during the Asia trading session despite the news that North Korea launched a long range ballistic missile which flew over the Japanese islands of Okinawa.

The fall out from this has been brief with USD/KRW now back at levels trading prior to the announcement. Halpenny notes that in Japan, the hope of substantial economic and monetary policy changes under a new LDP-led government continue to help the financial markets. The Nikkei 225 closed up 0.59% today at the highest level since 19th April.

Halpenny notes that the research team at Mitsubishi UFJ Morgan Stanley have pointed out that the responses in a “Quick QSS” equity market survey showed that “forex visibility” rating was at the highest level since 1996 and is currently the dominant driver of bullish equity sentiment. When asked what would happen to Yen under a new Government, 71% of respondents stated that the Yen would weaken, indicating that expectations of further weakening appear to be extremely strong. Halpenny notes that the latest IMM data backs that up of course with the net short Yen speculative position at over 141K contracts, the largest since July 2007 prior to the onset of the financial crisis.

Financial markets will remain in opinion poll watching mode ahead of the general election on Sunday. Polls this week showed the potential for the LDP to win nearly 300 of the 480 seats in the Lower House of the Diet. With New Komeito´s haul, that would take a two party coalition close to the two-thirds majority that could over-rule any veto in the Upper House of the Diet. Halpenny notes that the DPJ has the largest number of seats in the Upper House, although it doesn´t hold a majority.

He suspects that a newly elected PM Abe would in all likelihood reaffirm his policy intentions in regard to the BoJ and the Yen, which may help support the pair and other Yen crosses. However, he finishes by noting that “these bold changes will be a while in coming which leaves this extreme yen short position vulnerable to a squeeze. In four out of the last five years, IMM speculative yen positions returned to close to flat in the final weeks of the year.”

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