USD/JPY: Higher As BoJ Holds Course

 | Dec 20, 2013 05:39AM ET

USD/JPY continues to move higher, as the pair trades in the mid-104 range in Friday trading. The struggling yen has lost close to 200 points since Wednesday and is trading at five-year lows against the soaring US dollar. In economic news, Thursday's US releases were a major disappointment, as Unemployment Claims rose for the second consecutive week. As well, Existing Home Sales and the Philly Manufacturing Index both fell short of their estimates. On Friday, the Bank of Japan said that it would continue its monetary base policy statement as well as its QE program. In the US, today's highlight is Final GDP.

The yen continued to weaken following the BOJ Monetary Policy Statement on Friday. As expected, the Bank is holding steady with its monetary base and asset purchase programs. The BOJ will continue to increase the monetary base by 60-70 trillion yen annually and the purchase of Japanese government bonds by 50 trillion each year. The Bank's aggressive monetary policy has revived the economy and put the breaks on deflation, but has severely weakened the yen, which is trading at five-year lows against the US dollar.

Anyone looking for some drama from Bernard Bernanke and the Federal Reserve on Wednesday was not left disappointed. The Fed announced that it was tapering its QE program by $10 billion a month, commencing in January. This will reduce the Fed's asset purchases to $75 billion every month, comprised of $40 billion in Treasuries and $35 billion in mortgage bonds. The announcement came as somewhat of a surprise, as most analysts had not expected the Fed to hold off on any QE reductions until early next year. The currency markets reacted sharply to the news, and USD/JPY jumped to 104.53, its highest level since October 2008.

In its dramatic tapering announcement, the Federal Reserve was careful to separate tapering from rate hike expectations. Fed chairman Bernard Bernanke stated that interest rates are likely to remain low even after the unemployment rate drops below 6.5%. Previously, the Fed had stated that it would start to consider rate increases when unemployment fell below this level. Bottom line? With the unemployment rate at 7.0%, it could be a while before we see higher interest rates in the US.

Overshadowed by the Fed's bombshell announcement, a two-year, bipartisan budget agreement is sailing through Congress. The deal was overwhelmingly approved in the House of Representatives last week and the Senate followed suit on Wednesday, passing the measure by a vote of 64-36. The bill will now go the President Obama for his signature before becoming law. The agreement sets limits on government spending for two years and reduces the deficit by a modest $23 billion. Democrats and Republicans both had criticism of the proposal, but there is general agreement in Washington that the compromise reached is a positive step which removes the threat of a shutdown which paralyzed the government in October for 16 days.