FOREX-Yen pinned to lows before Japan election

Fri Dec 14, 2012 4:56am EST

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By Anirban Nag

LONDON, Dec 14 (Reuters) - The yen fell against the dollar and the euro on Friday and was likely to stay under pressure on expectations that the Bank of Japan would aggressively ease monetary policy in coming months.

The euro was steady after euro zone flash PMI numbers were broadly in line with expectations. Traders were turning slightly positive on the single currency following a successful Greek debt buyback and after an agreement was clinched on a single euro zone banking supervisor.

The dollar bought 83.85 yen, up 0.3 percent on the day, having risen as high as 83.95, its highest level since March 21. It was not far from its March 2012 peak of 84.187, which is seen as a major resistance level.

Traders cited an options barrier at 84 yen with the options market also showing increasing bias for more yen weakness with investors increasingly buying yen puts.

"The yen is the only game in town with volumes thinning out," said Peter Allwright, head trader at fund manager house RWC Partners. "Investors are short yen heading into the election and even in the longer term we expect the yen to weaken."

Bets the yen will weaken have risen significantly as Japan looked set to get a prime minister keen to push for more money printing by the central bank to stimulate the moribund economy.

Japanese media reported the conservative Liberal Democratic Party (LDP) is set for a stunning victory in elections on Sunday, cementing speculation that LDP leader Shinzo Abe will be in a strong position to push for bold monetary easing.

The dollar has risen 5.5 percent against the yen in the past month and technically there are signs the pair has risen too fast in a short period of time, with its relative strength index standing well above the "overbought" mark of 70.

Some said the yen may regain some lost ground if the Bank of Japan disappointed next week. The BoJ is widely expected to ease monetary policy next week, but the amount of asset purchases it decides to do has left room for disappointment.

"Given high expectations, it is hard to think the BOJ will come up with surprises. The BOJ is already buying shares, the only central bank that's doing such things," said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank.

At present, all the expectations about BOJ easing have created "a bit of a festival but the market may be in for a hangover after that," she added.

EURO HOLDS GROUND

The euro also rose to an eight-month high of 109.63 yen , and was on track to end the week almost 3 percent higher on the yen. It was last trading at 109.62 yen, up 0.2 percent on the day with option barriers at 110 yen cited.

The euro was also on track for its biggest weekly gains against the dollar in three weeks.

It rose to a high of $1.3120, its highest level in more than a week and was last trading at $1.3082, flat on the day. Traders cited offers to sell from central banks at $1.3135/40 with reported option barriers at $1.3150 and $1.3200 were also cited.

"The euro is well supported and the PMIs were decent," said Beat Siegenthaler, currency analyst at UBS. "In the short term it looks as a buy on dips with positive developments (in) the Greek debt buyback and a single banking supervisor also helping sentiment."

Markit's Flash Composite Purchasing Managers' Index, which polls around 5,000 businesses across the 17-nation bloc and is viewed as a reliable growth indicator, rose to a nine-month high of 47.3 this month, beating forecasts for a rise to 46.8.

But the index still pointed to a contraction within the currency bloc, keeping alive risks of an interest rate cut by the European Central Bank in coming months.

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