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Yen weakness should see follow through

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Yen weakness should see follow through

This past weekend’s election should go a long way toward improving sentiment in the Abe government and their ability to generate an export led economic recovery based on increasing asset prices and a weakening currency.  Abe popularity was solidified this weekend, and with Governor Kuroda leading the Bank of Japan, yield should remain low allowing the currency to weaken in value.

As expected, Japan’s governing coalition secured a majority in the upper chamber. This means that the Japanese government is arguably the strongest among the major countries and makes it even more difficult to challenge Abe’s economic and fiscal policies.  This is generally perceived to be positive for Japanese equities and negative for the yen.  Additionally the victory now shifts the debate over next year’s implementation of the controversial retail sales tax from between parties to within the Liberal Democrat Party itself.

The yield differential which is generally highly correlated to the currency pair continues to favor holding dollars over yen.  The currency differential in the 10-year space is slightly less than 160 basis points making it difficult for investors to short the US dollar in favor of the Yen.

On Friday, the USDJPY currency pair tested a downward sloping trend line which was drawn from the highs made in May to the highs made in July.  A break above this level would likely test the July highs near 101.25.  Support is seen near the 10-day moving average near 99.77.

Momentum on the currency pair is flat with the MACD (moving average convergence divergence index) printing near the zero index level.  The spread and the 9-day moving average of the spread are virtually the same level.  The relative strength index (RSI) is also reflecting a consolidative tone, printing near 51, which is in the middle of the neutral range.

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