AUD/JPY: Yen Gains on Renewed Concerns Over the Global Economy

The Japanese yen is foreseen to gain alongside the Australian dollar today on heightened concerns over whether the US Congress can swiftly address the so-called fiscal cliff. Downbeat comments made by Senate Majority Leader Harry Reid sparked a sell-off in US stocks yesterday, a trend which is seen to continue into today’s Asian trading.

Speaking to reporters yesterday, Reid expressed his disappointment that members of Congress have made little progress in negotiating the terms necessary to avoid triggering a slew of year-end tax increases and spending cuts. Such scenario, according to analysts, could tip the world’s largest economy back into recession. Redi also said that he agrees with President Barack Obama that Social Security should not be part of a fiscal-cliff deal, another topic for contention during the negotiations. As a result, the Dow Jones Industrial Average fell 0.69 percent, the S&P 500 index dropped 0.52 percent, while the Nasdaq Composite lost 0.30 percent yesterday on elevated concerns over the US economy. Today, the broad slump in stocks continued as the Nikkei Stock Average has shed 0.5 percent in early Tokyo trading while Australia’s S&P/ASX 200 index has also declined 0.5 percent in Sydney trading.

Meanwhile, demand for the Australian dollar is seen to decline today after the latest economic outlook by the Organization for Economic Cooperation and Development suggested a bleaker outlook for the Australian economy. In the report, the OECD said that a new major global recession in the next two years cannot be ruled out, underscoring concerns that Australia’s record 21 years of uninterrupted growth could be in peril. The OECD lowered Australia’s growth forecasts for 2013 to 3 percent, down from its forecast of 3.7 percent six months ago. The Australian economy is tipped to slow over the next two years as the government’s promise to deliver a budget surplus, the strong Aussie, and households’ aversion to debt hampers activity.

As for Japan, the economic outlook also continues to darken. Yesterday, prices of corporate services dropped by 0.7 percent year-on-year in October, marking its fifth consecutive monthly decline, on lower costs of advertising and information communications. According to analysts, the report suggests that businesses continue to cut spending amid the global economic slowdown. Japanese consumers are likewise reluctant to spend as a report tomorrow is estimated to reveal that retail sales fell 0.7 percent on a yearly basis on October. Amid such concerns over the global economy, a short position for the AUD/JPY is recommended today.

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