Yen fails, Abenomics to survive

The yen dropped to a seven-year low against the dollar as investors bet Japan’s Prime Minister Shinzo Abe will win an early election, renewing his mandate to pursue stimulative monetary policy and structural changes.

The Japanese currency slid versus most of its 31 major peers, and the nation’s two-year bond yield fell to zero for the first time, after the Bank of Japan warned that inflation may slip below 1% as it maintained record stimulus. The Bloomberg Dollar Spot Index approached a five-year high before the Federal Reserve releases minutes of last month’s policy meeting. New Zealand’s dollar ended a six-day gain after Auckland-based Fonterra Cooperative Group Ltd. said the price of milk powder fell.

“Everything is pointing to further weakening,” said Fabian Eliasson, who works in foreign-exchange sales at Mizuho Financial Group Inc. in New York. “They’ve been fairly adamant about putting another round of easing on the table and I think a lot has to do with the election and that they get support to continue this program.” Dollar-yen may rise to the 120 level, he said.

The yen depreciated 0.7% to 117.63 per dollar as of 9:11 a.m. New York time, after touching 117.68, the weakest level since October 2007. Japan’s currency slid 0.8% to 147.69 per euro and touched 147.78, the least since October 2008. The 18-nation euro rose 0.2% to $1.2556.

Volatility Gauge
Yen six-month implied volatility rose to 11%, up from 8% on Oct. 30 before the BOJ expanded its bond buying program. The yen is seen as the third most volatile currency after the Brazilian real and South African rand.

Australia’s dollar lost the most of its U.S. counterpart’s 16 major peers, slipping 0.8%, after central bank Governor Glenn Stevens said yesterday that there was a “pretty material risk” that the currency will go lower than its current level.

New Zealand’s currency slumped 0.6% to 78.73 U.S. cents to halt a six-day advance. The so-called kiwi, named for the image of the flightless bird on its NZ$1 coin, dropped versus most its 16 major peers as Fonterra’s GlobalDairyTrade website said the average price for whole milk powder fell to $2,400 a metric ton from $2,522 at the previous auction.

Canada’s dollar declined after the U.S. Senate refused to approve TransCanada Corp.’s $8 billion Keystone XL pipeline, a project to carry Canadian oil through Montana, South Dakota and Nebraska to refineries near the Gulf of Mexico. The currency depreciated 0.4% to C$1.1344 per dollar.

U.K. Inflation
The pound was the day’s biggest gainer, strengthening after minutes from the Bank of England’s latest meeting showed policy makers beginning to raise concern that inflationary pressures may build.

“Investors are reducing short-sterling positions on the BOE minutes,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “There was an expectation of greater dovishness.” A short position is a bet an asset’s price will decline.

The pound rose 0.3% to $1.5686 and appreciated 0.2% to 80.05 pence per euro.

Bloomberg’s dollar index, which tracks the U.S. currency against 10 major peers, advanced 0.1% to 1,096.01 after closing at 1,097.86 on Nov. 6, the highest close since April 2009.

Fed Policy
The Federal Open Market Committee releases minutes from its Oct. 29 meeting, when it ended its bond-buying program and cited an improving job market. Policy makers maintained a pledge to keep rates low for a “considerable time,” a release at the time said.

“Our U.S. economists think the October FOMC statement was a critical turning point in the policy cycle, and the Fed effectively shifted to a tightening bias,” Adam Cole, the head of global currency strategy at Royal Bank of Canada in London, wrote in an e-mailed note. “We expect the minutes to foreshadow bigger changes for December. The balance of risks is therefore USD-positive heading into the minutes.”

The Fed meets Dec. 16-17.

The BOJ kept a plan to expand its monetary base by a record annual pace of 80 trillion yen ($680 billion) unchanged. The central bank’s easing program has pushed down the whole yield curve, Governor Haruhiko Kuroda told reporters today.

A yield curve is a chart showing rates on bonds of different maturities.

BOJ View
Kuroda warned inflation could fall below 1% after a report this week showed the world’s third-largest economy slid into recession. The central bank is targeting price gains of 2%. The governor also emphasized that the onus is on the government to strengthen its finances after Prime Minister Abe postponed a planned sales-tax increase and called early elections.

“Structural reforms and these kind of things need to get put through” in Japan, Charles Diebel, head of macro strategy at Aviva Investors, said about Abe’s policy plans. The yen “may be in for a bit of a pause because we’ve moved to such a strong degree. Longer-term prospects: I think it probably goes a lot further and could even get toward the 125 area.” He spoke in an interview on Bloomberg Television’s “Countdown” with Anna Edwards, Mark Barton and Manus Cranny.

About the Author