Yen Sell-Off Continues As Markets Prepare For Election

Another round of sell-off was seen in the Japanese yen Friday as investors prepared for the election to be held in Japan Sunday. The Liberal Democratic Party is widely tipped to regain power in Japan after the election and former prime minister Shinzo Abe is expected to replace current prime minister, Democratic Party of Japan's Yoshihiko Noda.

Abe is known for his strong push for "unlimited easing" from BoJ of achieving a 2% inflation target, which is comparatively much more than the current 1% target, considering that Japan is still struggling in deflation. Also, this week's extension of easing in US would give Abe more bullets to pile pressure on the BoJ, not just on deflation, but also on growth. The quarterly Tankan report from BoJ released today showed large manufacturers' index dropped to -12 in the current quarter, comparing to -3 in prior quarter, and expectation of -9.

Territorial dispute with China weighed down on the already weak exports. BoJ is widely expected to expand its easing program next week. It's likely that the central bank will add another JPY 5-10T to its current JPY 91T asset purchase and lending program. However, markets are indeed looking beyond next week's meeting as much more work is needed to be done from the central bank to bring sustainable recovery.

Asian equities are firm today on prospect that China's recovery is gaining further momentum. The HSBC manufacturing PMI rose to a 14-month high of 50.9 in December, up from November's 50.5. Also, that's the fifth straight month of gain. HSBC said that the recent surveys showed that "ongoing growth recovery is gaining momentum, mainly driven by domestic demand conditions."

Nonetheless, it also mentioned that " the drop of new export orders and the downside surprise of November exports growth suggest the persisting external headwinds." Also, it noted that "calls for Beijing to keep an accommodative policy stance to counter-balance the external weakness, provided inflation stays benign."

In US, the lack of progress in reaching a deal to resolve the fiscal cliff sent US markets lower overnight. White House spokesman Jay Carney blamed the GOP for not budging on "the fundamental issue". He said the GOP has not shown "any difference in the stated position by the speaker of the House when it comes to revenue" The Republicans, however, said that the Democrats "only moved backwards since the beginning".

The negotiation is now in a deadlock as Boehner returned home to Ohio for the weekend. At the press conference of the December FOMC meeting, Fed Chairman Ben Bernanke expressed his concerns over the fiscal cliff and indicated that the Fed would not be able to avert the crisis if the White House and the Republicans failed to agree on a deal. He also warned that, "clearly the fiscal cliff is having effects on the economy."

Looking ahead, eurozone November CPI and Q3 employment will be released in European session. meanwhile, US CPI and industrial production will be the main feature in US session.