The yen weakened against the dollar on Monday, closing in on the psychologically key 100 level after the Group of 20 countries gave a nod of acceptance to reflationary moves in Japan that have resulted in a sharply weaker currency. The G20 over the weekend stopped short of criticising the radical easing steps which the Bank of Japan says are aimed at battling deflation, with any currency weakness simply a by-product.
In response, the dollar climbed as high as 99.90 yen, within striking distance of a four-year high of 99.95 set on April 11 and the 100 level, where option barriers are said to be lined up. By 1048 GMT, it was at 99.76 yen, up 0.3 percent. "We are 20 ticks away - it could be there in the next hour or it could be there in the next week," said Adam Cole, global head of FX strategy at RBC Capital Markets.
A break of 100 could trigger stop-loss buying, which could take the pair up to 101.45 yen, an April 2009 high which could act as near-term resistance. Reported large option expiries at 100 will keep the currency pinned to that level. "The rally in dollar/yen has, as far as we can see, been driven by layer upon layer of leveraged short yen positions being built up," said RBC's Cole, who sees the yen staying at around the 100 mark a month from now.
"To make it (a break of 100) sustainable, you need to see strong evidence that Japanese investors are buying rather than selling overseas assets, or you need to see a shift in hedging behaviour ... But at the moment we don't see that from capital flows data." One-month implied volatility on dollar/yen jumped as high as 14.415, a level not seen in two years, in a sign of increased demand for options to protect against yen weakness. Data on Friday showed currency speculators raised their bets against the yen in the week ended April 16, while lifting positions in favour of the US dollar.
The yen has weakened 23 percent against the dollar since mid-November, when Shinzo Abe, who became Prime Minister in December, promised bold monetary and fiscal expansionary policies during his election campaign. The BoJ's sweeping monetary expansion unveiled earlier this month, which aims to inject $1.4 trillion into the economy in less than two years, has given fresh momentum to the currency move. Many market players expect the BoJ's massive bond buying to force real-money Japanese investors such as life insurers to shift more funds to higher-yielding foreign bonds.
"Japanese real money investors are expected to announce further details of their investment intention for the new fiscal year over the coming days; hence, with the G20 support for BoJ policy, we expect the JPY-weakening trend to remain intact," analysts at Morgan Stanley said in a note, although they recommended staying cautious ahead of the BoJ meeting.
The euro also rose against the yen, and was last up 0.2 percent at 130.09 yen, nearing a three-year peak of 131.10 set earlier in the month. Against the dollar, though, the euro fell 0.1 percent to $1.3040, edging towards the bottom of the $1.30 to $1.32 range held for nearly two weeks. Technical analysts at SEB said that a break below $1.3026 would likely "trigger a new round of selling" in the euro, with the next support then seen at $1.3001.
From a fundamental point of view, the euro has been hamstrung by persistent talk of an interest rate cut by the European Central Bank. Such bets could intensify if this week's data releases, including Tuesday's flash Purchasing Manager's Index for April, come in weak. "If we don't see an element of stabilisation, let alone improvement (in the flash PMIs) then the euro could come under pressure," said Jeremy Stretch, head of currency strategy at CIBC World Markets.
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