FOREX-Yen nears recent lows before Japan elections; Aussie rises

Fri Jul 19, 2013 9:34am EDT

* Japanese PM Abe's party expected to win, would pressure
yen
    * Dollar rises to one-week high versus yen
    * Australian dollar rises after China's central bank move

    By Wanfeng Zhou
    NEW YORK, July 19 (Reuters) - The dollar held near a
one-week high against the yen on Friday ahead of Japan's upper
house elections, which could add momentum to Prime Minister
Shinzo Abe's aggressive push for monetary easing to fight
deflation.
    The Australian dollar rose after China's central
bank announced long-awaited interest rate reforms, a move it
said would help lower financing costs for companies. China is a
major export destination for Australia.  
    Opinion polls show Abe's ruling Liberal Democratic Party and
its New Komeito Party coalition partner are on track to win a
hefty majority. That would give him more freedom to push his
agenda of monetary easing, public spending and structural
reform, which could weigh on the yen.
    "What appears to clear, barring any sharp surprises in the
outcome, is that Mr. Abe is likely to consolidate his power and
maintain course for an accommodative fiscal and monetary
policy," said Boris Schlossberg, managing director of FX
Strategy at BK Asset Management in New York.
    "That in turn should prove to be dollar/yen bullish unless
the (Japanese government bond) market in Japan turns volatile
once again."
    The dollar hit a one-week high of 100.86 yen before
pulling back slightly to 100.31 yen, down 0.1 percent on the
day. Resistance was cited at 101.54 yen, the July 8 high. The
dollar is up more than 15 percent against the yen on the year.
    Earlier in the session, the yen rose after Japan's benchmark
Nikkei stock average slipped. A fall in equities can
increase risk aversion and spark demand for the yen, a
traditional safe-haven.
    But the yen stayed vulnerable to the Bank of Japan's massive
monetary expansion, while the dollar has been supported by
prospects that the U.S. Federal Reserve could start scaling back
its stimulus.
    While the options market has been showing demand for
dollar/yen puts, or bets the dollar will lose ground, one-month
risk reversals have narrowed to around 1.1 vols in
favor of dollar puts on Friday from 1.75 vols on July 11,
indicating market players have trimmed their yen strength bets.
    Chris Turner, head of FX strategy at ING, said any strength
in the yen would be temporary and risk reversals suggest markets
are slightly less concerned about a big correction lower in
dollar/yen. 
    "The focus is very much on beating deflation over the next
two years, and the Bank of Japan is committed to doubling its
balance sheet by the end of 2014," he said, which will involve
pumping yen into the market.
    Some strategists cautioned that with expectations so high, 
if Abe does not manage a landslide victory there was an outside
chance this could lift the yen.
    "It could put a question mark on Abe's policies and be yen
positive," said Niels Christensen, FX strategist at Nordea.
    The euro was little changed at $1.3109, while the
dollar index was down 0.1 percent at 82.754, above
Wednesday's three-week low of 82.342. 
    The Australian dollar rose 0.5 percent to $0.9211.
    China's central bank announced long-awaited interest rate
reforms on Friday, removing its floor on lending rates for
commercial banks, meaning that banks will now be able to cut
rates as much as they see fit to attract borrowers.
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