FOREX-Japan election result knocks vulnerable yen

Mon Dec 17, 2012 4:12am EST

Related Topics

* Yen hits 20-month low versus dollar, 7-1/2 mth low vs euro
    * Prospect of more losses after LDP's landslide victory
    * Most expect BOJ to ease policy at this week's meeting
    * But hefty short yen positioning may limit yen falls

    By Jessica Mortimer
    LONDON, Dec 17 (Reuters) - The yen fell to its lowest in
more than a year and a half versus the dollar on Monday after a
landslide election victory for Japan's Liberal Democratic Party,
which is committed to aggressive monetary easing.
    The LDP's victory will propel ex-Prime Minister Shinzo Abe -
who has called for "unlimited" monetary easing, an increase in
the inflation target and big spending on public works to rescue
the economy - back to power. 
   Analysts expect the prospect of ultra-loose monetary policy
to cause the yen to lose further ground in coming weeks,
depending on the pace of policy change. However, the fact that
bets against the yen are already hefty could limit its losses.
    The dollar was last up 0.5 percent on the day at 83.91 yen
, having earlier hit 84.48 yen, its strongest since April
2011. This left it with the potential to target the 200-week
moving average at 85.008 yen.
    The extent of the LDP's victory will give the new government
a greater chance of pushing through policies. The LDP and its
ally the New Komeito party secured the two-thirds majority
needed to overrule parliament's upper house. 
    "The fact that the LDP secured a two-thirds majority gives
them a strong mandate and will lead to significant policy
changes," said Ian Stannard, head of European currency strategy
at Morgan Stanley.
    "The yen weakening trend will be sustainable and dollar/yen
will move higher while euro/yen also has the potential to move
sharply higher." He said Morgan Stanley forecasts the dollar to
rise to 90-92 yen by the end of 2013, while the euro could rise
to 113 yen by the end of this year.
    The euro jumped to around 111.30 yen, its highest
since late March. It was last up 0.6 percent at 110.50 yen. 
    The next test is this year's high of 111.43 yen, with
support said to lie at Friday's session high of 109.98 yen. 
    The Bank of Japan is scheduled to meet on Wednesday and
Thursday. The BOJ will most likely increase its asset-buying and
lending programme, currently at 91 trillion yen, by another 5-10
trillion yen, sources have said. 
  
    Abe told a news conference on Monday that Japan needs a
sizable supplementary budget to beat deflation, given the
country's output gap. 
    The euro's gains against the yen also helped it against the
dollar. It was last steady at $1.3163, having hit $1.3187
overnight in Asia, its highest in seven-and-a-half months. 
    Analysts said the dollar may be hampered by any signs of
troubles in U.S. talks to avert a "fiscal cliff" of $600 billion
worth of tax increases and spending cuts due next month.
    
    SHORT YEN BETS
    Although analysts believe the yen will continue to fall
following the LDP's victory, its falls could be limited in the
short term as investors cut back short positions.
    Data from the Commodity Futures Trading Commission on Friday
showed speculators' bets against the yen were at their highest
in over five years. Investors had already turned bearish on the
yen in anticipation of an LDP victory. 
    Some analysts also warned the yen may be poised for a
rebound as Abe's actions could fall short of his tough talk, at
least in the short term, while the BOJ's easing steps are
expected to trail those of the U.S. Federal Reserve for now.
    Still, strategists at Barclays recommended maintaining long
positions in three-month dollar/yen call options, due to the
stronger mandate for the BOJ to target higher inflation. 
    "Our estimates suggest a 10 percent multilateral nominal
(yen) depreciation would be needed to get a one-off inflation
boost of just 1.5 percent," they said in a note to clients.
    The CFTC data also showed currency speculators turned
bearish on the U.S. dollar for the first time since late
October. The dollar index was slightly higher at 79.616.
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