MORNING BRIEFING: The Democratic Party of Japan (DPJ) has overwhelmingly won the elections, repercussions expected on USDJPY currency pair.

[RTFX-Trading]

MORNING BRIEFING: The Democratic Party of Japan (DPJ) has overwhelmingly won the elections, repercussions expected on USDJPY currency pair.

What’s new:
Switzerland: 2% contraction in GDP annual rate in Q2.
United States: Chicago PMI at 50.0 in August.
Euro zone: HICP inflation is -0.20% in August.
Australia: Central Bank leave rates unchanged at 3%.

Today:


Overnight Rates and Indices:
EURUSD: 1.4361 – 1.4321.
USDCHF: 1.0599 – 1.0570.
GBPUSD: 1.6309 – 1.6255.
EURJPY: 133.76 – 133.12.
USDJPY: 93.19 – 92.84.
DowJones: 9'496 -0.50%.
NASDAQ: 2’009 -0.97%.
S&P 500: 1’020 -0.81%.
Nikkei: 10’529 +0.35%.
Shanghai: 2’710 +1.60%.
Gold: $953.60.
Crude Oil: $70.35.
 
Comments:

The publication of the Chicago PMI led investors to reduce their long Dollar positions and purchase “carry trades”.

The day is loaded with economic news, with the manufacturing PMI index from Europe, followed by figures from the British mortgage market and real estate figures and the ISM manufacturing PMI from the US this afternoon.

Investors are not expected to take new positions before the end of the week, with the ECB decision and US employment report scheduled on Thursday and Friday.

The Democratic Party of Japan (DPJ) has overwhelmingly won parliamentary elections this Sunday and will form its cabinet by mid-September. After 54 years of reign, Japanese voters Sunday relegated the Liberal Democratic Party (LDP) to the opposition and placed the responsibility of reviving an ailing economy in the hands of a party without any previous governing experience. The overwhelming majority opens the way for the DPJ to apply the institutional and economic reforms as expected by the people of Japan. The post-war political system in Japan has come to an end, the period of uncertainty that follows should affect the currency market and especially the US Dollar against the Japanese Yen (USDJPY) both in the short and medium term:

Firstly in the short term: 1. As the historic victory by the DPJ was widely anticipated by most investors, no additional impact is expected. 2. However, there will be a period of transition by mid-September, which should encourage investors to test a potential increase in Japan's currency. History shows us that in the 1993 elections when the LDP lost the majority, the USDJPY fell from 108 to 105 during the transition period, after which the Yen strengthened further to reach 101. 3. It seems that the new Finance Minister should be Yasuhisa Fuji. The latter has recently said that the government should not intervene unless it is an extraordinary situation. The Japanese government is not expected to challenge the strengthening of the Yen until the 85 level against the US Dollar is reached.

In the medium / long term: 4. During the electoral campaign, the DPJ tended to support the independence of the Bank of Japan, and strongly supported the abandonment of the quantitative easing policy and the zero interest rate policy. If the DPJ continues in this perspective, the market will be expecting an exit policy from the BoJ sooner rather than later, which should have a positive impact on the Yen. 5. The next Minister Yukio Yatoyama is in favor of a diversification of foreign currency reserves of Japan. Even though he said a process of creating a sort of "Asian common currency" would take 10 years. Discussions of a potential diversification of reserve foreign currencies (mostly in USD) should induce investors to sell the US Dollar. Mr. Yukio wishes to adopt a more independent diplomatic policy from the United States and build better relations with the rest of Asia. In my opinion, the new Japanese government wants a little distance between Tokyo and Washington.

Good Day

Emman Xuereb
RTFX Ltd
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