Yen Sell-Off Overwhelmed Slow Markets

The yen was under spotlight last week as prime minister Noda surprised the markets by dissolving the lower house of parliament which now triggered an election in December. The development raised the prospect that the next likely prime minister LDP Abe would push for more aggressive easing from BoJ. Meanwhile, stock markets tumbled on concern on the US fiscal cliff but such risk aversion was not reflected in the Forex markets.

Mild weakness was seen in the aussie and Canadian dollar but that was far from being decisive. There were all the talks about uncertainty on Greece situation but we must note that the euro and swissie were indeed the strongest currencies last week. That certainly told us markets aren't too worried about the eurozone for the moment.

Technically, the anticipated rebound in stocks didn't happen. The Dow breached 12500 level briefly last week and we might see a deeper sell-off ahead before it gets some strong support from 12000 psychological level. The developments might help lift dollar index towards 82 level.

Based on current price structures, another low in EUR/USD below 1.2661, in GBP/USD below 1.5827 is likely. But their weakness might somewhat be neutralized by buying in yen crosses. Same could be said in commodity currencies where USD/CAD's strength looks tired. And AUD/USD's fall is far from being impressive. So overall, selling yen will be the preferable choice. And based on anticipated weakness in stocks, long USD/JPY is preferred to other yen crosses.

There was some positive news on US fiscal cliff on Friday. President Obama said he had a constructive meeting with congressional leaders and he said that everyone agreed to "find solutions and take action as soon as possible." House speaker Boehner presented his framework for tax-and-spending overhaul. He sounded upbeat saying that "we've put revenue on the table, as long as it's accompanied by significant spending cuts," and "it's going to be incumbent on my colleagues to show the American people we're serious."

Treasury Geithner said that was a "good meeting" with a "very good" tone. Geithner is optimistic that the deal on averting the fiscal cliff is "doable within several weeks." Nonetheless, he also urged to clear the picture sooner rather than later as “this huge cloud of uncertainty hanging over the economy."

The October FOMC minutes unveiled that policymakers discussed several issues at the meeting, including replacing the calendar language to data threshold in future guidance and implementing additional asset purchases after the expiration of Operation Twist in December. However, no consensus was reached during the meeting and no action is expected in December. The minutes also stated that the FOMC staff revised up economic forecasts in the near- and medium-term but suggested that "progress in reducing unemployment over the projection period was expected to be relatively slow."

In Europe, eurozone finance ministers agreed to grant Greece another two years, until 2016, to lower the deficit to 2% of GDP target. Also the debt level is targeted to be brought down to 120% of GDP until 2022. The decision of release of the next tranche of bailout fund hasn't be made, as expected. Juncker said that "a few more things have to be checked, because not everything that was promised to be done, has been done. But these are more minor things that can be tackled administratively and not legally." Juncker expected to have a "definite decision" at the November 20 meeting. Also, IMF chief Lagarde will cut short the Asian tour to attend the Eurogroup meeting.

Data from the eurozone showed that the 17-state region is back in recession with -0.1% qoq contraction in Q3, following the -0.2% qoq contraction in Q2. Among the member countries, five were in recession including Greece, Spain, Italy, Portugal and Cyprus. Meanwhile, Germany and France only grew a mere 0.2% qoq. According to ECB's quarterly survey, economists lowered their Q3 growth projection to 0.3%, down from 0.6%. 2014 projection was lowed to 1.3%, down from 1.4%.

BoE's quarterly inflation report delivered a dovish tone on the UK's economic outlook. It downgraded the country's economic forecasts and suggested that growth will be "weaker for longer." The central bank anticipates annual GDP to expand 2% in 2 years while inflation would be at about 1.9% at the end of its forecast period. Policy makers did not rule out further monetary easing but stated that the MPC members discussed a wide range of policies.

The yen was broadly sold offer after current prime minister Noda said that he will dissolve the parliament, which then happened on Friday. That triggered an election on December 16. It's believed that the opposition Liberal Democratic Party would be the likely winner in the election and it will give BoJ additional pressure on policy easing.

Indeed LDP's leader Abe has openly said recently that BoJ should continue easing until inflation hit 3%. That's a very aggressive target considering that BoJ's 1% inflation goal is still far from sight. Other policies that Abe advocates include sub-zero interest rates and increase in public investment.