USD/JPY – Yellen Nomination Boosts US Dollar

WASHINGTON (Oct 10)   The US dollar continues to push higher against the yen on Thursday. The pair is trading close to the 98 line in the European session. The dollar received a boost as Janet Yellen was nominated by President Obama to head the Federal Reserve. As well, the FOMC Meeting minutes indicated that most policymakers favor tapering QE before the end of the year. In economic events, Japan posted strong manufacturing data, but this was not enough to stem the dollar’s move upwards. In the US, today’s highlight is Unemployment Claims.

Japanese numbers looked solid late Wednesday. Core Machinery Order gained 5.4% in September, compared to a flat 0.0% last month. This easily beat the estimate of 2.9% and was a thee-month high. This is an encouraging release from the manufacturing sector, especially after Preliminary Machine Tool Orders slumped -6.3% earlier in the week. There was more good news as Tertiary Industry Activity gained 0.7%, improving from the previous reading of -0.4%. The estimate stood at 0.5%.

The dollar was broadly higher in Wednesday, trading as President Obama nominated Susan Yellen to head the Federal Reserve. Yellen will take over from Bernard Bernanke, who is due to retire early next year. Yellen, who currently serves as Fed vice-chairwoman, became the leading candidate after former Treasury Secretary Lawrence Summers withdrew his candidacy. Yellen is considered dovish in stance and has supported Bernanke in three rounds of QE increases. Her nomination must be confirmed by the Senate, but she is expected to be widely endorsed.

The minutes of the September Federal Reserve policy meeting were released on Wednesday. At the meeting, the Fed surprised the markets by opting to hold the course with its bond-purchasing program, which currently runs at $85 billion/mth. The minutes stated that the decision not to begin tapering was a “close call”. This has increased speculation that we could see tapering before the end of the year. However, the monkey wrench in all this is the fiscal uncertainty from shutdown and looming debt crisis. As well, the Fed is heavily dependent on key releases such as Non-Farm Payrolls, which have been suspended to the shutdown. So it’s unlikely that we’ll see any moves to reduce

QE before December at the earliest.

As if Congress doesn’t have its plate full with the budget deadlock and shutdown, a debt ceiling crisis and could unleash a devastating financial crisis. The US has a debt worth $16.7 trillion, and the country will run out of funds to service the debt by October 17, unless Congress authorizes raising the debt ceiling. Otherwise, the US could potentially default on its obligations, which could cause chaos in the domestic and international markets. There is a lot of bad blood between the Republicans and Democrats over the shutdown, and this will undoubtedly complicate negotiations over the debt ceiling. There are signs of some progress, with talks between the sides focusing on the possibility of a short-term increase in the debt limit, which would avoid a default, for now.