Growth Potential Japan Has Waited Years for


With Shinzo Abe’s Liberal Democratic Party seemingly days away from controlling both houses of Parliament, the possibility of expanded stimulus has pushed USDJPY through the 100 level once again.

It was a relatively quiet summer night of trading made notable by the move in USDJPY, which cleared the psychologically important 100.00 level in anticipation of an Abe victory in this weekend’s Japanese elections.

The polls are showing that Prime Minister Shinzo Abe is likely to win control of both houses of Parliament, giving his Liberal Democratic Party coalition the most legislative control since 2007. The news has spurred investor enthusiasm that Abe may now be able to expand his stimulus program to help spur growth in Japan.

As a result, USDJPY was bid all night long with the pair rising to a high of 100.30 in morning European trade. Still, the pair faces heavy resistance at the 100.50 and will likely need some support from North American data in order to clear that barrier.

Today’s Biggest US Event Risk

Yesterday, Fed Chairman Ben Bernanke steered clear of making any market-moving pronouncements and simply reiterated the Fed’s views that monetary policy will remain accommodative for the foreseeable future and that any improvements in US economic performance will not necessarily imply an instant change in monetary policy bias.

See also: Unspoken Fed Policies That Matter Most

Today's testimony is unlikely to produce any fresh insights. The primary message the Fed appears to be communicating is that it remains stationary for the time being as long as improvements in economic data is not yet strong enough to warrant a change in policy. Therefore, the rally in USDJPY is likely to be driven more by the developments in Japan, rather than any fresh initiatives on the US side of the Pacific.

GBP/USD Aiming Higher, Too

Elsewhere, UK retail sales reported in line with expectations, printing at 0.2%. On a year-over-year basis, sales improved to 2.2% vs. 1.7% expected. Coming on the heels of better claimant count numbers, the retail sales data is confirming that UK final demand is picking up and that Q2 GDP will likely see a marked improvement from the start of the year.

The GBPUSD pair popped to 1.5200 in the aftermath of the release and remains well bid at these levels. However, the pair needs to clear key upside resistance at 1.5300 in order to see more sustained momentum.

The USD/JPY Catalyst to Watch

In North America today, the economic calendar carries only the Philly Fed survey, and the markets will still be focused on Fed Chairman Bernanke's Congressional testimony.

Despite adhering to his dovish rhetoric, the Chairman has been relatively sanguine about recent US economic performance, and if his optimism remains in place for the second consecutive day, it could provide the lift that USDJPY needs in order to clear the key 100.50 level as the day progresses.

By Boris Schlossberg of BK Asset Management

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