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The biggest news overnight was from the Japan – the government announced a surprise stimulus package to try and boost the flagging economy. The overall size of the stimulus is miniscule compared with stimulus programmes elsewhere, at only $10 billion; however the timing of the move is significant. With Japan’s government in deadlock and facing its own fiscal cliff, lawmakers have very little rope to work with. Financial legislation to increase the borrowing limit has been blocked by the opposition to try and force fresh elections (the umpteenth in recent years). If no agreement is reached then Japan, the world’s largest debtor, could go over the fiscal cliff edge at the end of November. The money for this stimulus has been found from other budgets, but it is unlikely that more cash will be found. This leaves the BOJ as the only entity in Japan with the tools to kick-start the economy. For an export-based economy like Japan the best way for them to do this is to try and weaken the yen. As rates are already at 0.1%, we expect the Bank to boost its Asset Purchase Programme. The market is looking for an increase of JPY 10 trillion, however we believe there is a good chance it could do more than this – potentially to the tune of JPY 20 trillion – to try and weaken the currency.
Japan’s very own cliff edge
The extent of the crisis in Japan has prompted major banks (and dealers of government debt) to hold a meeting this morning to try and press the government to pass the Budget bill (and thus avoid a fiscal cliff) saying that Japan faces a real risk of a credit rating downgrade if the deadlock persists. This suggests that the next month could be crucial for Japan and we may see further downward pressure on the yen as fiscal and political problems (a toxic mix) erode the yen’s status as a safe haven.
The BOJ may target the exchange rate next week
Because the problems facing Japan’s economy are largely external – the territorial dispute with China and the Eurozone sovereign debt crisis – which are both dampening demand in Japan’s largest trade partners, targeting the exchange rate could be the best way to boost the economy. Thus, an aggressive round of asset purchases from the BOJ next week may be the enough to get USDJPY above the 80.00 resistance level. We have flirted with life above this level in the last couple of days but it has proven to be a tough hurdle to get over. After the announcement of the government stimulus programme USDJPY jumped as high as 80.35, however it has since drifted back below 80.00 as the market realised that the amount of stimulus is fairly minimal. However, expectation that the BOJ may now be forced to act in an aggressive way next week could be enough to get a weekly close above 80.00. This would be a very bullish signal for this pair.
We are currently inside the weekly cloud on this chart, which leaves 81.10 as the next major resistance level to get over. Above this level suggests a new paradigm for USDJPY and supports a medium-to-long term uptrend.
One to Watch: USDJPY weekly Ichimoku cloud chart
Is France a bigger risk than Spain?
Elsewhere, Europe is taking a back seat, although problems in the currency bloc remain far from over. Spain till has not applied for a bailout even through the growth picture remains as weak as ever. Spanish unemployment hit 25.02% in Q3. This is depression-era levels, highlighting the extent of economic weakness in Spain, which could make it even harder to reach deficit targets in the coming years. This rounds off a very poor week of economic data for the currency bloc, with signs that France is falling away from the core economic pack and joining the peripheral economies. French bond yields have moved higher this week, but they still remain at extremely low levels. The market isn’t focusing on France yet, but it might. Weak growth combined with a government who does not want to deal with restoring public finances to a more stable footing could hurt the French bond market in the long-term, which would mark the most serious development in the sovereign debt crisis. Rating agency S& downgraded some large French banks last night citing increased economic risks – this is a warning sign to France and to investors in its bond market.
Watching the Nasdaq
Ahead today is US GDP for the third quarter at 1330 BST. The market expects a pick up to 1.8% from 1.3% in Q2. If the consensus is correct this would mark the second consecutive sub-2% growth rate in the US economy since 2009. A wave of weak economic earnings, including from tech giant Apple, continues to weigh on stocks. Equity bulls have to hope this was a blip and big consumer companies like Apple can make it up during the holiday spending season and QE3 liquidity will come to the rescue. These hopes are helping to support stocks. Although equities have been selling off they have not fallen below key support levels. Watch the Nasdaq, the US tech sector index, closely as it is testing its 200-day sma support. Below here could signal a broad based decline in US equity markets.
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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