The Japanese yen took a short break from its recent falls, but is again dropping sharply in Friday’s trading. USD/JPY has now pushed above the 88 level, and the yen is in free-fall, having shed almost 200 pips since January 1. Japanese releases do not resume until next week, but the US markets are in full swing, with two key employment releases on Friday – Non-Farm Employment Change and Unemployment Rate. The other highlight is the ISM Non-Manufacturing PMI. On Thursday, US employment numbers presented a mixed picture. Unemployment claims were higher than the estimate, but the ADP Non-Farm Employment Change looked very sharp, posting its best performance since March.
The currency markets brought in the new year with quite a bit of volatility, thanks to the fiscal cliff agreement Congress crafted on New Year’s Day. The markets breathed a sigh of relief as the fiscal cliff agreement was approved, but more trouble lies ahead. Although both the Senate and House of Representatives passed the deal by large margins, there was plenty of grumbling on both sides of the political divide – perhaps proof that the deal reached was a true compromise. Most notably, the hard-fought agreement failed to deal with two critical issues – the debt ceiling and spending cuts. The debt ceiling will be reached in February, and Republicans have vowed that the government must agree to deep spending cuts before they will agree to raise the debt ceiling. For their part, the Democrats are strongly opposed to cuts to major federal programs such as Medicaid. The IMF has also weighed in, saying that the fiscal agreement is not enough, and that the US must take further action to deal with its long-term debt problem. The IMF call for Congress to quickly approve a comprehensive plan which to “ensure both higher revenues and containment of entitlement spending over the medium term”.
As we start 2013, a look at recent key US releases points to a confusing picture. Employment numbers released on Thursday were mixed. Unemployment Claims shot up to 372 thousand, well above the estimate of 356K. On the other hand, ADP Non-Farm Payrolls was outstanding, jumping to 215K. This crushed the estimate of 134K. Recent US housing figures were also a mixed bag, with New Home Sales down, but Pending Home Sales up sharply. Although there are clear signs that the US economy is improving, this zigzagging makes it difficult to predict how strong the recovery really is and what to expect in early 2013.
What explains the slumping Japanese currency? On Friday, the yen took a tumble following the release of the minutes of the December FOMC meeting, where several members came out in favor of ending the current monetary easing, known as QE4, sometime in 2013. As quantitative easing is a dollar-negative event, the possibility of an early end to the easing is bullish for the US dollar. As well, the new government in Japan is putting strong pressure on the Bank of Japan to adopt further monetary easing measures. The world’s third-largest economy is mired in recession, and the government is taking wants to aggressively tackle deflation in order to kick-start the stagnant economy. The yen has responded to these developments by falling sharply against the US dollar, dropping to levels not seen since July 2010.
