Sunday, 21 July 2013

Yen Climbs After Abe Election Win; Dollar Drops on Fed Outlook

By Candice Zachariahs & Kevin Buckland - Jul 22, 2013 10:00 AM GMT+0400
The yen rose against most major peers after Japan’s ruling party failed to win an independent majority in upper-house elections and as traders speculated on Prime Minister Shinzo Abe’s ability to push through reforms.
The greenback held a weekly decline against the euro as Pacific Investment Management Co.’sBill Gross said he expects the Federal Reserve won’t tighten policy before 2016. Demand for the euro was tempered after Portugal’s ruling coalition parties and the main opposition failed to reach an agreement that would help the nation complete its bailout program. Australia’s dollar climbed after officials in China, the South Pacific nation’s biggest trading partner, moved to scrap a rule that had constrained bank lending.
July 22 (Bloomberg) -- Hamish Pepper, a currency strategist at Barclays Plc in Singapore, talks about the outlook for the yen and trading strategy. Pepper also discusses his expectations for the Japanese government's economic policies. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
“People had expected that if he’d achieved a single-party majority he could have placed more pressure on the Bank of Japan to ease policy further, and that would have been a yen negative,” Hamish Pepper, a currency strategist at Barclays Plc in Singapore, said in a Bloomberg Television interview, referring to Abe. “That’s what we’re seeing now in the moves in dollar-yen.”
The yen strengthened 0.7 percent to 99.97 per dollar as of 6:58 a.m. in London after earlier gaining as much as 1 percent. It rose 0.6 percent to 131.49 per euro. The dollar declined 0.1 percent to $1.3153 per euro following a 0.6 percent weekly drop to $1.3143 on July 19.
Abe’s Liberal Democratic Party and its New Komeito ally now have 135 of the 242 seats in the upper house, according to estimates by state broadcaster NHK. The LDP has controlled the lower house since elections in December.

Policy Choices

Abe today said he will focus on the historic task of defeating deflation. Decisions loom on issues including whether to cut corporate taxes, reduce labor regulations, make it easier to consolidate agricultural land and allow greater access to foreign goods and services. Another choice is how much focus to place on strengthening defense and revamping Japan’s constitution.
With China increasingly challenging Japan’s administration of the Senkaku Islands, known as Diaoyu in Chinese, the LDP has proposed buying first-strike weapons such as cruise missiles. The party also has proposed amending the pacifist constitution to legitimize Japan’s maintenance of armed forces.
“Late last week, markets were expressing concern about Abe’s control of both the lower and upper houses and the potentially more nationalistic policies that may develop as a result,” saidRobert Rennie, the chief foreign-exchange strategist at Westpac Banking Corp. (WBC) in Sydney. “The extent to which we see signs of increased tension between Japan and its key trading partners in the region will be an increased driver for equity and therefore currency markets.”

Tapering Bets

The yen has declined more than 10 percent this year, the most among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The greenback has rallied 5.1 percent, the biggest advance, and the euro has added 4.8 percent.
In two days of congressional testimony last week, Fed Chairman Ben S. Bernanke, said bond purchases “are by no means on a preset course” and may be reduced more quickly or expanded as economic conditions warrant.
“The market is already positioned for dollar strength, so any disappointing economic data from the U.S. or dovish comments from policy makers can send the dollar south,” said Yunosuke Ikeda, the head of foreign-exchange strategy at Nomura Securities Co. in Tokyo. “The latest data is showing a little bit of a slowdown, giving a good reason to reduce dollar-bullish speculative positions.”

Gross Tweet

The Fed buys $85 billion of Treasuries and mortgage debt each month as part of its third round of quantitative-easing stimulus to cap borrowing costs, a program that tends to debase the dollar. It has held the benchmark interest-rate target at zero to 0.25 percent since 2008 to support the economy.
“So bonds come out of their coffin and it’s not even Halloween,” Gross, who manages Pimco’s $268 billion Total Return Fund, said in his posting on Twitter. “Bernanke says follow policy rate and we agree.”
Gains in the euro were limited after Portugal’s parties failed to reach an agreement on measures to complete a European Union-led bailout plan after six days of talks. The coalition’s planned 4.7 billion euros ($6.2 billion) of spending cuts were “one of the important obstacles” to reaching a deal, Socialist Party leader Antonio Jose Seguro said July 19.
President Anibal Cavaco Silva said yesterday the government will stay in office until its term ends in 2015 and reaffirmed he doesn’t want to call early elections.
“There was some relief as the President ruled out snap elections,” Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong, wrote in a note to clients.
Australia’s dollar gained after the People’s Bank of China ended a floor on borrowing costs previously set at 30 percent below the benchmark rate.
The Aussie rose 0.6 percent to 92.23 U.S. cents.
To contact the reporters on this story: Candice Zachariahs in Sydney at; Kevin Buckland in Tokyo at
To contact the editor responsible for this story: Rocky Swift at