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Japanese Prime Minister Shinzo Abe is back making waves in financial markets this morning, though the moves of calling for a snap election and delaying the unpopular sales tax hike planned for next year had largely been expected after the Q3 GDP bomb on Sunday.   Abe confirmed that he will be dissolving the lower house of parliament on November 21st in preparation for an election in mid-December, along with postponing the sales tax hike that had been schedule for October 2015 by eighteen months.   In addition, Finance Minister Aso said the government would work on passing a supplementary budget for additional fiscal stimulus over the current fiscal year, and expectations are that the supplementary budget could be in the neighbourhood of ¥2-3tn.  Abe has confirmed that a loss of majority for the LDP in the upcoming elections would be a rejection of ‘Abenomics’, though with the delay of the sales tax hike and the combination of a supplementary budget, it appears as if ‘Abenomics’ is charging ahead for the moment.   At the moment it is likely the LDP will take a hit at the polls though manage to keep their majority intact, but watch for more focus on the Japanese elections and what it means for fiscal and monetary policy in the region closer to election time.   It was another choppy overnight session for USDJPY which ramped back into the 117s ahead of Abe’s announcement, only to be battered lower on a ‘sell-the-fact’ type mentality, where the pair trades close to unchanged in the mid-116s ahead of the opening bell in North America.

Turning our attention to Europe, both the Euro and Pound are making headway against the greenback this morning, garnering buying interest after favourable economic reports have propped up the respective currencies.   Inflation figures for the UK came in bang on the median forecast estimate with a 1.3% increase on an annualized basis, up slightly from the September reading of 1.2%.   The firming of consumer prices helped dispel some lingering concerns of downside risks to inflation from last week’s Quarterly Inflation Report, though overnight index swaps are still telegraphing market participants have pushed out expectations surrounding a Bank of England rate hike until late 2015.   Cable has been struggling to sustain any outsized gains this morning, though the absence of a downside surprise from the CPI release has helped edge the pair into the high-1.56s.

The Euro is also better bid than offered midway through the European session, taking its cues from a better than expected German ZEW survey which saw the headline reading rebound from October’s -3.6 to a +11.5 in November.   Along with the sharp rebound on the headline, current conditions also perked up slightly from 3.2 to 3.3, helping to ease concerns the powerhouse of the zone’s economy is losing momentum in an expedited fashion.   The Euro rallied against the big dollar after the release, and has managed to sustain buying interest as EURUSD changes hands just north of the important 1.25 level.

 

 

 

Market churn is the best way to describe price action in financial markets ahead of the opening bell in North America.   S&P futures are facing a tug-of-war between the bears and the bulls with no clear leader in sight at the moment, while front-month WTI tries to hold on to the $75/barrel level.   The overnight performance from the Pound and Euro has put downward pressure on the DXY, which in turn has helped the commodity-linked currencies exhibit some slight strength.  Produce prices for the month of October in the US came in warmer than expected across the board, yet the upside surprise has been unable to provide much to deter the consolidation in the greenback.   USDCAD continues to pivot around 1.13 ahead of the opening bell; an important level that we forecast will continue to act like a magnet as traders await tomorrow’s release of the minutes from the last FOMC meeting.

Further reading:

Stronger USD But Path Non-Linear: New FX Forecasts – UBS

Abe knocks USD/JPY from 117- just some stop hunting?