Tags: dollar | japan | yen | investors

Dollar to Strengthen 10 Percent Against Japanese Yen

Dollar to Strengthen 10 Percent Against Japanese Yen
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By    |   Monday, 23 October 2017 07:25 AM

On Friday evening, Fed Chair Janet Yellen gave a prepared speech, titled “A Challenging Decade and a Question for the Future,” wherein she said: “The Federal Reserve has confronted two key challenges over the past several years: One, the FOMC had to provide additional policy accommodation after short-term interest rates reached their effective lower bound; and two, subsequently, as we made progress toward the achievement of our mandate, we had to start scaling back that accommodation in the presence of a vastly expanded Federal Reserve balance sheet … the likelihood that future monetary policymakers will have to confront those two challenges again is uncomfortably high. For this reason, we must keep our unconventional policy tools ready to be deployed again should short-term interest rates return to their effective lower bound.”

Yellen remained strictly stuck to monetary policy. She commented when asked how important tax reform is to the Federal Reserve System: “I try to stay in my lane and I'm not going to get involved.”

Over the weekend, President Donald Trump said to Maria Bartiromo of the Fox Business Network about the nomination of the new Fed Chair: “I’ve been seeing a number of people and most people are saying it’s down to two: Mr. Taylor; Mr. Powell.”

In case Mr. Taylor would be the President’s choice, then markets expect, which is important for investors, a sharply higher dollar and a sharp bond sell-off that will dampen risk sentiment. In case it’s Mr. Powell then markets expect only a small dollar bounce while risk assets will like the continuation of gradual Fed tightening.

Besides that, this weekend’s election in Japan produced a stronger showing of the governing coalition than had been expected. The government retained its two third majority in the lower house of the Diet. This makes constitutional change easier. The scale of the victory also increases the prospect of a continuation of the current loose economic policy stance. Bank of Japan’s Governor Kuroda whose time expires shortly is likely to be kept in his current position, which means ongoing monetary policy accommodation too.

We are seeing the Japanese yen weakening against the dollar on the news and that is likely to continue.

Investors shouldn’t be surprised, at least that’s how I see it, to see yen-dollar exchange rates in the zone of 1.20 to 1.30 yen per dollar in the not so far future, which represents a strengthening of the dollar of about +10 percent against the Japanese yen, which is of course substantial.

In Europe meanwhile, parliamentary elections in the Czech Republic have produced another Eurosceptic party, called the ANO. ANO means 'Yes' in Czech and stands for Action for Dissatisfied Citizens party. The ANO will need to form a coalition in order to govern, but their policies could be generally described as ant-euro and anti-immigration. This pattern is becoming something of a trend amongst Eastern European members of the European Union (EU) at the moment.

Nevertheless, it’s unlikely to cause significant investor anxiety as such, but combined with events in Catalonia where “direct rule” is being imposed by the Spanish central government, it does have a certain element of political risk to the European story, at least in the near term.

Meanwhile, UK Prime Minister May is to outline the government strategy for exiting the European Union to Parliament today. This pre-supposes there is a strategy of course. With the opposition labor party threatening to align with the governing Conservative Party rebels on certain areas of the legislation, this could be significant in judging the uncertainties that are likely to surround the process.

There is little economic data to distract financial markets from the political rumblings today. There are a couple of ECB speakers on the agenda, but this close to the ECB meeting on Thursday, October 26, there is little to be expected in terms of market moving information from them.

Anyway, on Thursday it will be interesting to see ECB present Draghi finally announcing his, dovish of course, tapering program for 2018.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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There is little economic data to distract financial markets from the political rumblings today.
dollar, japan, yen, investors
Monday, 23 October 2017 07:25 AM
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