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FOREX-G7 steps in to weaken yen, market braces for more

ForexMar 18, 2011 03:44PM ET
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* G7 launches first coordinated intervention since 2000

* Yen dives in Asia but decline eases in U.S., Europe

* Traders bracing for extended intervention campaign (Updates prices, adds comment, details; changes byline)

By Wanfeng Zhou

NEW YORK, March 18 (Reuters) - The Group of Seven on Friday launched its first coordinated currency market intervention since 2000 and pledged to do more if needed to rein in a soaring yen, but investors betting on a sustained decline in the Japanese currency could be disappointed.

Both the Federal Reserve and Bank of Canada said they had sold yen, bolstering European and Japanese efforts to restrain the yen and calm markets after Japan's devastating earthquake, tsunami and unfolding nuclear crisis.

The dollar rose nearly 4 percent to 82.00 yen on trading platform EBS in European trade, but hedge funds and other speculative accounts tested official resolve by buying into the yen sell-off. The dollar last traded just below 81 yen, though still up 2.7 percent on the day.

"We still think that there will be appreciation pressure on the yen," said David Mann, head of research, Americas, at Standard Chartered in New York. "I would expect strong defense of 80. We can't rule out testing below that and then seeing intervention push it back higher again."

Tokyo market estimates had the Bank of Japan selling some 2 trillion yen ($25 billion) over the course of the day. Nomura Securities estimated the European Central Bank intervened to the tune of about 5 billion euros ($7.1 billion). The Bank of Canada is estimated to have spent around C$100 million to C$150 million ($101.5 million to $152.3 million), according to BMO Capital Markets.

C.J. Gavsie, director of FX sales at BMO Capital Markets in Toronto, said since North American trading hours began, the dollar has given back some of its gains versus the yen.

"We've seen straightforward pressure to be buying yen and selling dollars, which is exactly the opposite thing that this concerted effort was targeted to do," he said.

Expectations that Japanese retail and corporate investors would start bringing money home for rebuilding after the disaster drove the yen up this week. So did heavy selling by margin traders who were forced to unwind positions funded with cheaply borrowed yen as risk aversion spiked.

Michael Woolfolk, senior strategist at BNY Mellon in New York, said intervention activities could continue for weeks, which could help stabilize the dollar/yen in the 80 to 85 range.

"It's evident this is not just a one-day event. The G7 has made an extended commitment that we think will stretch over a number of weeks, and we think it will be successful," he said.

TRENDS UNCHANGED?

Technical analysts noted upside targets around Monday's peak of 82.45, followed by the 100-day moving average of 82.61 and 83.30, the intraday high from last Friday. Nomura currency strategists said the 82.70-83.00 range would be an "ideal level" for computer-driven model accounts to buy dollars.

Giuseppe Manieri, principal of Premium Currency Advisors, said Friday's closing level will be closely watched. "If it is on the higher side of the weekly bar, having hit the lows this week, it might mean a reversal.

"For now on the long-term side nothing has changed, the trend is still heavily downwards," he said. Zurich-based Premium Currency Advisors has $875 million under management.

Paresh Upadhyaya, strategist at BofA Merrill Lynch, said it may require a move toward higher interest rates in the United States to sustain downward yen momentum.

"For intervention to be successful, it needs to be followed by policy action," he said. "If the Fed starts openly debating exiting quantitative easing, that would move interest rate differentials sharply in favor of the dollar against the yen."

VOLATILITY FALLS

As the dollar rebounded, it became cheaper to hedge against further yen gains. Implied volatility on one-month dollar/yen options stood at 13.5 percent, down from 21 percent on Thursday.

In currency ETF options, traders exchanged more than 16,000 contracts on the CurrencyShares Japanese Yen Trust , or 3.1 times the fund's average daily volume by early afternoon trading, according to options analytics firm Trade Alert. Shares of the fund fell 2.68 percent to $121.86.

Most of the action was in the March $124 and $125 put options ahead of the contract's expiration after the close.

"So investors are probably closing these positions and taking some profits off the table after the big move in the yen," said WhatsTrading.com options strategist Frederic Ruffy. "Trading is mixed in both puts and calls on the fund as people try to take positions in anticipation of the next move in the dollar/yen currency pair."

The euro hit a session high around 115.56 yen before easing to 114.63, up about 3.6 percent.

The euro rose to a four-month high against the dollar of around $1.4184 after the intervention in euro/yen.

The South Korean and Chinese currencies also jumped against the yen. Those exchange rates are of particular interest to Tokyo, as excess yen strength undermines Japanese trade relative to its Asian neighbors. (Additional reporting by Steven C. Johnson and Gertrude Chavez-Dreyfuss in New York, Doris Frankel in Chicago and Martin de Sa'Pinto in Zurich ; editing by Dan Grebler)

FOREX-G7 steps in to weaken yen, market braces for more
 

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