Yen: Three arrows fly to the target




The news of the Liberal Democratic Party’s victory in the parliamentary elections in Japan has allowed the pair USD / JPY quotes rise above the 114 mark for the first time since the beginning of the year. Supporters of Shinzo Abe has managed to obtain the so-called super-majority, allowing them to control the country’s highest legislative body, and of the increase of the probability of the re-election of their leader for a third term. In the end, Abe will be the oldest Prime Minister of Japan. Its policy, the «Three Arrows» will continue to be realized. Simultaneously, the victory of the liberal democrats increases the chances of preservation of the ultra-soft monetary policy of the BoJ, which is a «bearish» factor for the yen.

Since 2012, the reduction has led to a depreciation of the Japanese currency by 20% and the growth of stock indices by half. The results of the parliamentary elections to reduce the uncertainty, which allows us to count on the continuation of the rally in the stock market. However, according to BTMU, no serious reforms are expected in the near future, so that the growth potential of the Nikkei 225 index and USD / JPY seems limited. In addition, Donald Trump, whose position on the devaluation of the currency-the competitors of the US dollar is widely known, can visit Tokyo in November. However, the Ministry of Finance and the Bank of Japan did not restrict the weakening of the yen by verbal intervention.

The dynamics of the Nikkei 225 index

Source: Bloomberg.

Oddly enough, on the eve of the announcement of the results of the October meeting of the ECB, a number of popular media have expressed the idea that it would be good that the Board of Governors to follow in the footsteps of the Bank of Japan. Their policy of targeting the yield curve is more and more supporters. It allows them to maintain the market rate of the debt at a low level, without this previous effort. The volume of bond purchases within quantitative easing is gradually reduced as the yield on u.s. bonds increases. As a result, the payments of the public debt remain at a low level and the likelihood of recurrence of the cone of hysteria 2013, when the Fed announced its withdrawal from the quantitative easing program, is reduced to zero.

The continuation of the USD / JPY rally is facilitated by an increase in the yield of treasury bonds against the background of expectations in the implementation of the tax reform. The adoption of the draft budget by the Congress for the next fiscal year and a reserve of reconciliation allows for a fiscal stimulus to be adopted by a simple majority in the Senate, 52 seats, of which 100 belong to the Republicans. As a result, the GDP of the united states is able to accelerate to 3% or more, which makes the risks of the Fed’s more aggressive monetary restriction important and inspires optimism in us dollars of fans.

The USD / JPY, the dynamics and the yields of the U.S. Treasury

Source: Bloomberg.

The central events of the week ending in October 27, will be the outcome of the ECB meeting and the dissemination of data on U.S. GDP for the third quarter. The second will have a direct impact on the rate of the u.s. debt market and the fate of the pair USD / JPY. The market will continue to show an increase of sensitivity to issues of tax reform and the selection of a new head of the Fed.

Technically, a breakthrough the resistance level of 114.3 enable the inversion of the «Shark» and will increase the risk of targeting by 88.6%.

The USD / JPY, daily chart



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