Yen Extends Decline As Abe Took Power

The yen sell-off was the main theme over thin holiday markets as USD/JPY soared to 27-month high and broke a key resistance level at 85.51. Shinzo Abe was elected by the parliament as prime minister on Wednesday, after his party won a landslide victory in an election earlier this month.

Abe reiterated his strong pledge to pressure BoJ into "bold monetary easing" and setting a 2% inflation target. He is expected to appoint a cabinet of close allies and some analysts said there seems to be a broad consensus among politicians on stronger BoJ actions. Meanwhile, the new finance minister Taro Aso said today that Abe has instructed him to formulate a stimulus package while new economics minister Akira Amari said that yen needs to maintain recent downward trends. Also, the BoJ minutes released earlier this week noted that some members proposed open-ended asset purchases until hitting the current 1% inflation target.

After all, the broad pressure on the Japanese yen remains on. Technically, USD/JPY's break of 85.51 resistance is an important sign of a long-term trend reversal that could pave the way back to 100 psychological level. EUR/JPY showed reversal indication much earlier and is heading back to 120 and above. GBP/JPY's reversal still needs a strong break of 140 to confirm but based on outlook in yen crosses elsewhere, it's likely that GBP/JPY would head back towards 160 in the medium-term.

The dollar recovered against most other major currencies but got stuck in range against the euro and Swiss franc as the Fiscal Cliff deadline looms. President Obama will make a final attempt avert the so-called Fiscal Cliff which would bring huge tax hikes and spending cuts in 2013. House Speaker Boehner urged yesterday that "the Senate must act first" and promised that House would weigh whatever the Senate approves.

Boehner said that House will either consider to accept the bills or send them back to the Senate with amendments. The Treasury's Geithner warned that "extraordinary measures" will be taken to postpone a US default into early 2013 if the negotiation carries on. The actions would include halting sales of certain securities and stopping new debt issuances.

On the data front, Japan housing starts, swiss UBS consumption indicator, UK BBA mortgage approves, US jobless claims, consumer confidence and new home sales will be released later today.