Daily Report

Yen Dives and Nikkei Surges as Abenomics Set to Continue after Landslide Victory in Snap Election

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Nikkei surges today while Yen tumbles on landslide victory of Prime Minister Shinzo Abe's Liberal Democratic Party (LDP) at the snap election on Sunday. At the time of writing, Nikkei is gaining over 1% and more than 220 pts. On the other hand, Yen is trading broadly lower. Removing political uncertainty is a key factor in lifting Japanese stocks. Meanwhile, continuation of ultra-loose monetary policies under Abenomics is a factor pressuring Yen. The forex markets are a bit mixed in initial trading, with Sterling leading the way up. Euro and Swiss Franc are slightly lower, following Yen.

Preliminary results project that the Abe's LDP/Komeito ruling coalition had won 312 seats in the 465-seat parliament, exceeding a two-thirds majority at 310. This is compared with 322 seats the coalition had secured in the 475-seat parliament previously. Maintaining the status quo signals that Abe would like to remain as the prime minister as he would continue to push his three arrows in the Abenomics.

One of which is aggressive monetary easing. There are talks that BoJ governor Haruhiko Kuroda will have a high chance to have his term renewed if Abe has a landslide victory. But after all, whether Kuroda would stay should not alter the ultra-accommodative policy stance.

Consumption tax increase in 2019 would be pushed ahead under Abe's leadership. As he promised, the revenue gain would be used on educational and social welfare spending. Meanwhile, Abe's robust fiscal spending stance indicates that the government would increase spending to stimulate the economy. Removal of political uncertainty and continuation of a dovish BOJ should keep Japanese yen under pressure in the near- to medium- term, assuming geopolitical tensions are not much a headache.

Euro await ECB, little reaction to politics

On Saturday, Spanish Prime Minister Mariano Rajoy announced the plan to dissolve the Catalan regional government, triggering the now infamous Article 155 of the Constitution. The measures will be sent to Senate within days and that would allow the Spanish government to suspend Catalonia's autonomy. Nearly half a million people protested in Barcelona against Rajoy's move as Catalan leader Carles Puigdemont denounced Rajoy's decision and said, "the Catalan institutions and the people of Catalonia cannot accept this attack." Puigdemont will meet other separatists on their response and they could declare independence this week.

Separately, Lombardy and Veneto, two wealthy region in Italy, voted overwhelming on Sunday for larger autonomy. 90% of voters voted for "yes" with turn out rate at above 40% in Lombardy and 57% in Veneto. Unlike Catalonia referendum, the ones in Lombardy and Veneto were held in line with the constitution even though they're not binding.

Overall, Euro shows little reactions to the political news. Traders's mind are mainly on ECB rate decision later this week. The market has already fully priced in an announcement of tapering of the asset purchase program from the current pace of EUR 60B per month until December 2017 "or beyond, if necessary". To what extend the ECB would taper is the question. Some suggest a reduction of monthly purchases to EUR 40B beginning in January 2018 for 6 months, while others expect a cut to EUR 30B for 9 months.

Trump to decide who's the next Fed chair in coming days

US President Donald Trump is in the final stage of choosing the next Fed chair. It's reported that current Fed Governor Jerome Powell and Stanford University economist John Taylor are now the front runners. And, one of the speculation scenario is that one will take the chair and other as vice. White House spokesman Sarah Sanders said that "that is something that is under consideration, but he hasn't ruled out a number of options. He'll have an announcement on that soon, in the coming days." 

Looking ahead

ECB's announcement of tapering will be the main focus of the week. A number of key indicates will also be released including PMIs and German Ifo. BoC will also meet but there is practically no chance for change in interest rates. In addition, eyes will also be on US and UK GDP as well as CPI from Australia and Japan. Here are some highlights for the week ahead:

  • Monday: UK CBI trends orders; Canada wholesales sales; Eurozone consumer confidence
  • Tuesday: Eurozone PMIs; US PMIs
  • Wednesday: Australia CPI; Swiss UBS consumption; German Ifo; UK GDP; US durables, house price index, new home sales; BoC rate decision
  • Thursday: New Zealand trade balance; Australia import price; German Gfk consumer sentiment; Eurozone M3, ECB rate decision; UK CBI realized sales; US jobless claims, trade balance, pending home sales
  • Friday: Japan CPI; Australia PPI; German import price; US GDP

GBP/JPY Daily Outlook

Daily Pivots: (S1) 148.45; (P) 149.14; (R1) 150.32; More

GBP/JPY's rebound from 146.92 extends higher today. Break of 149.73 support turned resistance suggests that pull back from 152.82 has completed at 146.92 already. Intraday bias is turned back to the upside for retesting 152.82 first. Firm break there will resume whole medium term rise from 122.36. On the downside, break of 148.13 minor support will turn bias to the downside and extend the correction from 152.82. In that, we'd expect strong support from 61.8% retracement of 139.29 to 152.82 at 144.45 to bring rebound.

In the bigger picture, medium term rebound from 122.36 is still expected to resume after corrective pull back from 152.82 completes. Firm break of 38.2% retracement of 196.85 to 122.36 at 150.43 will carry long term bullish implications. In that case, GBP/JPY could target 61.8% retracement at 167.78. However, break of 139.29 will indicate rejection from 150.43 key fibonacci level. And the three wave corrective structure of rebound from 122.36 will argue that larger down trend is resuming for a new low below 122.26.

GBP/JPY 4 Hours Chart

GBP/JPY Daily Chart

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
10:00 EUR Bundesbank Releases Monthly Report
10:00 GBP CBI Trends Total Orders Oct 9 7
12:30 CAD Wholesale Sales M/M Aug 1.50%
14:00 EUR Eurozone Consumer Confidence Oct A -1.1 -1.2