Yen extends decline ahead of BoJ

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By Chris Gore | December 20, 2012 9:32 AM EST

GoMarkets

The rewards for those short of Yen continued to flow overnight with further weakness noted against the greenback and Euro. While we've seen consolidative behavior against the Kiwi and Aussie, the in-form Euro went forged fresh highs against the Yen not seen since August last year. Similarly the USDJPY pair continued a north-bound trajectory, rising to fresh 20-month highs of Y84.63.

At the forefront of the Yen's latest wave of losses is today's Bank of Japan policy decision which is expected to see the bank boost its asset purchase program which currently stands at 91-trillion. Still brimming with confidence in the wake of his decisive election win, Japan's Liberal Democratic leader Shinzo Abe wasted little time in launching the first phase of his pro-stimulus agenda. True to his campaign theme, Abe has called on the Bank of Japan to begin a new stimulus agenda at the conclusion of their two-day meeting today.

This in mind, the potential for a short and sharp retracement of recent weakness is high should the BoJ fail to adhere to Abe's calls for immediate new monetary stimulus.  Still, it's hard to imagine elongated period of weakness, given Abe's pro-stimulus agenda calls for "unlimited" easing in an effort to kick start inflation to meet the 2-percent target. Time will tell if the Bank of Japan will cooperate with Abe's objectives, but with current Governor Masaaki Shirakawa's term expiring in April of 2013, one can expect a pro-stimulus ally to take the helm, in turn another key consideration for the Yen's near-term fortunes.

Gravity defying Euro ekes out more gains

Yen flows, selective dollar weakness and positive economic news continued to keep the Euro on the up overnight, making a beak to the upside of $US1.33 for the first time since early April. Ratings agency Standard and Poor's was finally the bearer of good news, upgrading Greece's debt rating by six notches and applying a stable outlook, albeit still holding Greece's credit rate in junk territory. Euro pundits also eyed a well-attended debt auction in Spain which sold 3.52 billion euros in short-term debt fetching a lower yield than previous similar auctions.

Also in the frame was a stronger than anticipated German business confidence survey by IFO. The business climate component of the IFO data series rose to 102.4 in December from a previous 101.4, suggesting confidence in the region is gain traction. At the time of writing the Euro is buying $US132.45.

Kiwi leads commodity bloc decline; AUD drifts lower

The Kiwi continued to consolidate overnight with losses noted against major counterparts, led by a decline against the in-form Euro. The NZDUSD pair also hit the wall after robust gains last week, with moderate weakness from US equities exacerbating a natural period of consolidation. Third-quarter growth data coming up at 0845 AEDT will be next key directive for the Kiwi which GDP expected to rise 0.4 percent, or 2.5 percent in annual terms, slightly lower than second-quarter growth of 2.6 percent. Despite the importance of today GDP release, FX markets are all about the Bank of Japan decision at the moment and any significant moves from the Yen are likely to encourage residual strength or weakness for the Kiwi.

Meanwhile the Australian dollar finds itself in a similar position with a recent consolidative phase now vulnerable to further downside surrounding today's Bank of Japan policy decision. The local unit broke the downside of 105-figure overnight and remains under moderate pressure at 104.9 US cents. The daily fiscal cliff news flow also appears to weighing somewhat despite the odd upbeat comments from both sides of politics suggesting a deal between President Obama and the Republicans could be close. One expects year-end flows and light liquidity could be emphasizing moves as the pre-holiday squaring takes place.

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