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Japanese Yen Rallies, Offsetting Lask Week’s Plunge

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Japanese yen extends gains ahead of FOMC meeting

The Japanese Yen rallied against the US dollar on October 27, 2015, after a massive fall in the currency last week. There were considerable risk aversion flows across foreign exchange markets before the US FOMC (Federal Open Market Committee) meeting. A dovish stance is widely expected from Fed chairperson Janet Yellen regarding the timing of a hike in interest rates.

On Tuesday, weak data from the United States led to further gains in the yen versus the US dollar. A leading monthly indicator of production, US Core Durable Goods Orders fell 0.4% against expectations of flat growth. Consumer confidence also fell below 100 to 97.6.

Flows into the yen increased since it’s a safe-haven currency and tensions increased between the United States and China over reports that a US navy warship came close to Chinese artificial islands.

The Japanese yen had already depreciated more than 15% in the last week compared to the US dollar, creating some long positions in the US dollar–Japanese yen pair that were offset by profit taking before the FOMC, causing corrections in the pair.

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Dovish statement expected from the BoJ

Even as speculations regarding the BoJ’s (Bank of Japan) easing remain high, Prime Minister Abe’s adviser Hamada dismissed the need for easing. However, considering economic reports and their negative outlook for Japan, it might be déjà vu for investors tracking monetary policy, as the BoJ shocked world markets by increasing its stimulus by 30 trillion yen last year.

Impact on the market

The currency-based Guggenheim CurrencyShares Japanese Yen ETF (FXY) was trading 0.54% higher at the close of trade on October 27, 2015. In contrast, the iShares MSCI Japan (EWJ) fell 0.80%.

Japanese ADRs (American Depositary Receipts) on US exchanges were trading with a negative bias. Leisure goods maker Sony (SNE) fell 1.2%. In the banking arena, Mitsubishi UFJ Financial Group (MTU) traded 0.92% lower while Sumitomo Mitsui Financial Group (SMFG) ended at -0.74%.

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