Fundamental Analysis

Yen Weakens ahead of Japanese Elections; Loonie Falls Sharply as Retail Sales Miss Expectations

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As markets head into the weekend, investors during the European session were concentrated on political developments in Spain as well as on Brexit negotiations. Japanese snap elections would be also in focus on Sunday with the yen showing some weakness on Friday. However, the loonie was the worst performer out of majors today after retail sales and inflation figures came in worse than expected.

The dollar index managed to pick up by 0.34% on the day, reaching a two-day high of 93.54 during the session as the Senate's approval of the 2018 budget resolution late on Thursday paved the way for tax cuts and upbeat readings on existing home sales increased investors' confidence in the US economy. The number of existing residential buildings sold the previous month jumped by 0.7%, surprising analysts who expected home sales to contract by 1.0%.

Dollar/yen stretched its uptrend by 0.74% towards a fresh two-week high of 113.41 ahead of snap elections in Japan on Sunday. Latest polls suggest an easy victory for the Japanese Prime Minister, Shinzo Abe, as the opposition party faces internal controversies, while Abe's strong stance on North Korean issues has enhanced public support for his leadership. If he succeeds to maintain his two-third majority and win his party's leadership next year then he will remain on track to lead the country until 2021. Chances for the BOJ chief Haruhiko Kuroda being reappointed for the second term will also rise, pressuring the yen due to Kuroda's ultra-easy monetary policy stance.

Meanwhile, in Spain, the Spanish Prime Minister Mariano Rajoy, has secured support from the opposition Socialists to suspend Catalonia's autonomy on Saturday when ministers will gather to decide on measures to activate Article 155. The plans on the table are said to include regional elections in Catalonia in January, with a government spokesman saying on Friday that "the logical end to this process would be new elections established within the law". However, whether this is part of the plan would be confirmed on Saturday.

The euro breached the 1.18 key-level versus the dollar, edging down by 0.54% to $1.1780.

On the second and final day of the EU summit, conclusions on the state of Brexit negotiations remained in the dark despite EU leaders expressing the willingness to move the talks to the next phase in the coming months. Uncertainty around the UK's financial obligations remained on the horizon as May refused to discuss the exit bill, arguing that the bill "will come as part of the final agreement in relation to the future partnership". Moreover, she reiterated her confidence in the negotiations but she added that "we still have some way to go".

The pound rebounded from a ten-day low touched earlier, gaining 0.26% on the day and rising back to $1.3190.

The kiwi stuck around five-month low levels around $0.6960 due to concerns that the new coalition government led by the Labour party in cooperation with the small New Zealand's First part would impose stricter policies on immigration and foreign investments. Markets were also worried about potential implications on monetary policy.

In Canada, retail sales growth turned negative in September after five consecutive months of expansion, with retail sales declining by 0.3% m/m, while analysts anticipated the figure to rise by 0.1 percentage points to 0.5%. Excluding auto sales and fuel, the core equivalent posted the largest reduction since February 2016, decreasing by 0.7% m/m and missing the forecast of a rise by 0.3%.

In other data, Canadian headline inflation grew in line with expectations by 0.2 percentage points to 1.6% y/y, whereas the core CPI which excludes volatile items fell slightly to 0.8%.

As a response, the loonie fell sharply against the dollar, with dollar/loonie jumping by almost 1% on the day to a 7-week high of 1.2608.

Regarding commodities, oil prices rebounded while gold dipped into losses. WTI crude climbed back to $51.50 (+0.47%) per barrel and Brent recovered to $57.54 (+0.72%). Gold erased earlier gains, sinking to $1,282.20 per ounce.

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