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FOREX-Yen's fall extends, threatens breach of long-term supports

Published 04/06/2011, 02:20 AM
Updated 04/06/2011, 02:24 AM
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* Yen drops to 2-1/2 year low vs Aussie

* Yen hits 11-mth lows vs euro, 6-mth lows vs dollar

* Carry trade revival hurts funding currencies

* Euro climbs to 5-mth high vs dollar

* ECB seen building in room to normalise policy

By Ian Chua and Masayuki Kitano

SYDNEY/SINGAPORE, April 6 (Reuters) - The yen extended a steep decline on Wednesday, hitting a 2-1/2 year low against the Australian dollar and an 11-month trough against the euro, threatening a breach of long-term support levels that could pave the way for further losses.

The Japanese currency also hit a six-month low against the U.S. dollar, with traders citing yen-selling by macro hedge funds and Japanese importers.

The yen and other currencies with very low interest rates such as the Swiss franc have slid over the past couple of weeks as market volatility declined, stirring talk about the revival of carry trades, a tactic of selling low-yielding currencies to fund investment in currencies with higher interest rates.

The yen's decline brought it close to a series of support levels against the dollar clustered roughly between 85.65 yen to 86.00 yen, suggesting that the dollar will slow its ascent against the yen in the near term.

But market players say the broader trend points to a continuation of yen weakness, given strengthening expectations that the Bank of Japan will lag behind other central banks in raising interest rates.

"The yen is weakening due to expectations for interest rates to rise abroad," said Tsutomu Soma, senior manager at Okasan Securities' foreign securities department in Tokyo.

"In countries other than Japan there are moves toward raising interest rates or exiting from extreme monetary easing... But in Japan, a massive amount of funds have been pumped into the money market as an emergency measure, and there is no talk of raising interest rates," Soma said.

The Australian dollar surged 0.7 percent to 88.27 yen , having earlier climbed to a high of 88.68 yen, its highest since September 2008, with 90 yen seen as the next possible target.

The euro hit an 11-month peak of 121.91 yen on trading platform EBS. It last stood at 121.66 yen, up 0.8 percent, with stop-loss buying having added to its rise.

The euro rose to a five-month high of $1.4282 . A rise beyond its November peak of $1.4283 would take the euro to its highest since January 2010.

The dollar rose 0.5 percent to 85.30 yen. The dollar scaled a six-month peak of 85.53 yen , having surged 12 percent from its post-World War Two record low of 76.25 yen hit in March, days after Japan's northeast was devastated by a massive earthquake and tsunami.

That surge in the yen prompted the G7 into a rare bout of joint intervention that helped curb market volatility and ultimately led to the start of the yen's downtrend.

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic on dollar/yen resistance levels, click on http://link.reuters.com/hyk88r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

DOLLAR/YEN NEAR RESISTANCE

Some market players say the dollar's rise above its 200-day moving average last week may be a sign that a long-term uptrend in the yen is about to shift, inviting investors who may have missed some yen weakness in late March to jump on the move in April.

The dollar is heading toward more chart resistance against the yen. Trendline resistance drawn off its June 2007 peak around 124 yen now lies roughly around 85.65 yen. Its 55-week moving average comes in near 85.80 yen, followed by the dollar's mid-September peak at 85.94 yen.

The latter level is key because it was a high in dollar/yen reached after Japan intervened in currency markets for the first time in six years.

"If you look at longer term charts, it looks like we may be at a turning point," said Soma at Okasan Securities.

"If the dollar breaks above 85.94 yen, we could see a test of levels around 90 yen," he added.

In a sign of such market sentiment, market players said there has been active trade the past two days in dollar/yen options with a strike price of 90 yen that mature in August.

The euro is also right near some longer term resistance levels. On weekly Ichimoku charts, a form of Japanese technical analysis that is widely used among market players, the top of the cloud comes in right around 122 yen while the 100-week moving average lies near 121.76 yen.

The Bank of Japan meets today and Thursday and should at least signal a willingness to ease further if needed [ID:nL3E7F53CH]. In contrast, the European Central Bank is all but certain to hike rates for the first time since July 2008 on Thursday.[ID:nN05113951]

"We expect that Trichet will confirm the importance of carefully monitoring inflation, and against a backdrop of a Fed unlikely to move swiftly to (remove) USD liquidity ... our bias remains for a higher EURUSD post-ECB," BNP Paribas analysts said in a note, adding that their target for the euro was $1.45. (Additional reporting by Yoshiko Mori in Tokyo, Reuters FX analysts Rick Lloyd in Singapore and Krishna Kumar in Sydney,; Editing by Kevin Plumberg)

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