USD/JPY: DPJ VICTORY DRIVES YEN HIGHER

The Japanese Yen strengthened across the board as investors cheer new leadership in Japan. After more than 50 years of unchallenged power, the Liberal Democratic Party (LDP) has been finally defeated by the Democratic Party of Japan (DPJ). The big question of if and when Prime Minister Aso will announce his resignation was answered almost immediately with Aso conceding defeat and confirming that he will resign as LDP head. Mr. Hatoyama, the current leader of the DPJ is expected to be confirmed as the new Prime Minister in approximately 2 weeks. However as happy as Japanese investors are about the change in leadership, the positive impact on the Japanese Yen could be limited. Long term trends in USD/JPY are determined by market fundamentals and overall risk appetite and not Japanese politics. With that in mind, USD/JPY is very weak. The sell-off in global equities and thin trading conditions ahead of the U.S. Labor Market holiday could drive the currency pair to a 6 month low of 91.75. In terms of economic data, good numbers have exacerbated the rally in the Yen. Manufacturing activity accelerated in August with PMI rising from 50.4 to 53.6 while industrial production rose 1.9 percent. Retail sales increased 0.4 percent from the previous month as the contraction in earnings slowed.

Kathy Lien. FX360.COM

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