USD/JPY Dec. 17 – Yen weakens after LDP wins Japanese Elections

The Japanese yen was broadly weaker as the Liberal Democratic Party swept to power after elections on Sunday. The LDP is expected to easily form a stable coalition which will give it a commanding majority in parliament, as the LDP and its coalition party won at least 300 seats in the 480-seat lower house. The LDP inherits a weakened economy, and has strongly come out in favor of further monetary easing in order to increase exports and encourage growth.

We could see further easing as early as Thursday, when the BOJ meets for its next policy meeting.

Back in the US, the dollar has been having its own troubles against the major currencies following the Federal Reserve’s decision to implement another round of monetary easing. Under this program, known as Q4, the Fed will purchase an additional $45 billion per month in Treasury holdings in order to boost the US economy. Meanwhile, the gridlock over the fiscal cliff shows no signs of letting up. The Republicans have retreated on their demand not to raise taxes, but want a hike to only affect those earning more than $1 million. The Democrats are insisting on tax hikes for those earning over $250,000.

There is mounting pressure on the two sides to reach an agreement, since if no action is taken, the combination of higher taxes and cuts in federal spending, which would occur automatically at the end of 2012, could push the fragile US economy into recession. In the end, some compromise or stop-gap measure is likely to be reached on Capitol Hill before the end of the year. The trading week begins with just a few economic releases out In the US, Monday’s releases looked awful. Empire State Manufacturing fell to a three-month low, coming in at -8.1 points. This was much worse than the estimate of -0.7 points.

USD/JPY for Monday, Dec 17, 2012

USD/JPY Dec 17 at 13:55 GMT

83.75 H: 84.16 L: 83.61

S3 S2 S1 R1 R2 R3
82.37 83.12 83.44 84.14 84.75 85.15

USD/JPY Technical
USD/JPY is edging higher and is closing in on the psychologically important 84 line. The next resistance line is at 84.14. On the downside, 83.12 has strengthened as the yen continues to weaken and the pair trades at higher levels.

• Current range: 83.44 to 84.14
Further levels in both directions:
• Below: 83.44, 83.12, 82.37, 81.83 and 80.
• Above: 84.14, 84.75, 85.15, 85.62 and 86.32.

OANDA’s Open Position Ratios
USD/JPY is marked by a very slight bias in favor of short positions. This ratio may change as the yen has been losing ground. However, with the BOJ meeting on Thursday, it will be difficult to predict which direction the pair will take.

USD/JPY briefly broke above the 84 level earlier on Monday, but has since retracted. As the markets continue to digest the elections results, we could see some further volatility as the pair tries to regain its footing.

USD/JPY Fundamentals

• 13:30 US Empire State Manufacturing Index. Estimate -0.7 points. Actual -8.1 points.
• 14:00 US TIC Long-term Purchases. Estimate 24.3B. Actual 1.3B.
• 16:00 US FOMC Member Jeremy Stein Speaks.
• 18:00 US FOMC Member Jeffrey Lacker Speaks.

*Key releases are highlighted in bold
*All release times are GMT

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