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