The yen tumbled on Tuesday as Japanese shares appeared to be stabilising after sharp losses and extreme volatility in the past few sessions, easing worries that investors may have to close their yen-selling positions to make up for losses. While the Nikkei's fall of more than 10 percent from its 5 1/2-year peak has reminded traders how painful a correction of a one-way trade can be, the market expects the Bank of Japan's massive easing to likely weaken the yen in the long term.
"The Nikkei's trading range is narrowing day by day. This is not like the panic we saw after the Lehman shock. If volatility is steadying at the current level, then dollar/yen is likely to head higher," said Kyosuke Suzuki, director of FX at Societe Generale in Tokyo. The dollar rose 1.0 percent to 101.95 yen, up more than a full yen from two-week low of 100.66 hit on Friday, staying above key technical support levels, including 21-day moving average, at 100.80 yen on Tuesday. Its kijun line on the daily Ichimoku charts, now at 100.37, is also seen as a major support, said Osamu Takashima, chief FX strategist at Citibank.
Japan's Nikkei share average was up 1.3 percent by early afternoon on Tuesday, recovering from a three-week intraday low hit earlier in the day. "For a while, the yen is likely to take the lead from the Nikkei," said Koichi Takamatsu, a manager of forex at Nomura Securities.
The euro also gained 1.0 percent to 131.70 yen, pulling up from Thursday's trough around 129.95. The dollar was also underpinned by expectations that the US Federal Reserve is ready to scale back its massive stimulus programme. The euro eased stood little changed at $1.2927, though it has no sign of breaking out of its rough $1.28-1.32 range in the past few months.
Investors have clearly turned bearish on the once high-flying Australian dollar, with the market still betting on yet more interest rate cuts given slower growth in the country's single biggest export market, China. The Aussie ticked up 0.1 percent to $0.9643, after a test to the downside was blocked by option-related bids just under $0.9600, but it still stayed close to the 2012 nadir of $0.9581.
A break there would take it back to lows not seen since October 2011. It has fallen 9 percent from a high of $1.0583 set just last month. Some analysts suspect the slide in the Aussie is overdone. Analysts at St. George believe the Chinese recovery will be sustained and the notion that the Fed could start unwinding its bond purchases within a few months is premature. "This would suggest the AUD should not drift too far away from parity for too long," said Janu Chan, an economist at St George in Sydney. "Our forecast of $1.02 by end 2013 and $1.00 by end 2014 reflects our view of a later pullback in stimulus from the Federal Reserve, the relative strength of the Australian economy and positive prospects for China."
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