The US dollar is little changed against most of the major currencies but is taking another step up against the yen. The failure of the Democrat Party of Japan to mount a serious challenge to Abe, despite the quite divided public support for Abenomics, is leading to surveys that the LDP and Komeito coalition will retain the super-majority they now enjoy. This has been the latest excuse to push the yen lower.
Moreover, despite the talk in some quarters of currency wars, the official push back is only noticeable by its absence. On top of that, the only even lukewarm resistance was expressed by some Japanese officials themselves.
That China delivered its first interest rate cut in a couple of years afterthe BOJ stepped up in QE efforts does not mean the PBOC was responding to Japan. Surely, we can agree that 1) China moves on its own timetable and 2) for its own reasons. On one hand, some observers recognize that China is continuing to slow, and accept that next week’s data will likely confirm soft price pressures (and reasonably firm exports), and yet its rate cut was primarily motivated by external developments.
A weekly close above the JPY120 level will likely target the JPY122.00-50 area next and then JPY124-JPY125. There is no compelling reason to give up the bearish yen story. As is well appreciated, the BOJ is expanding its balance sheet at a rate of 1.4% (of GDP) a month. There is not forum between now and early next year that would offer a platform for G7 or G20 officials to voice concern.
While the same can be said for the euro, the situation is a complicated by the divisions at the ECB. At yesterday’s ECB meeting, Draghi (and Constancio) did not display the sense of urgency that had been expressed previously. Besides the substantial downward revisions to growth and inflation forecasts, there was little new in Draghi’s comments. He did try to play down action at the next meeting (January 22) and seemed to draw attention to the March 5 meeting (which will be held in Cyprus), but that did not stop some from playing up the Jan meeting for new action.
