FOREX-Yen rises in choppy trade after Japan PM's election win

Mon Jul 22, 2013 12:18am EDT

Related Topics

* Japan's ruling coalition wins upper house majority

* Result was broadly in line with expectations

* Yen dips initially but later bounces in choppy trade

* Stop-loss orders add to yen's rise

* Jury still out on whether Abe will push tough reforms

By Masayuki Kitano

SINGAPORE, July 22 (Reuters) - The yen rose on Monday in choppy trading, having dipped initially after a big win by Japanese Prime Minister Shinzo Abe's ruling bloc in upper house elections gave Abe a stronger mandate for his reflationary economic policies.

The widely expected victory gave Abe's ruling bloc majorities in both the lower and upper houses, and was likely to pave the way for the government to pursue pro-growth fiscal policies and structural reforms to go alongside the central bank's aggressive monetary easing.

Gareth Berry, a G10 FX strategist for UBS, saw the dollar strengthening further against the yen longer term.

"I think it's good news for dollar/yen longer term, but it seems like it was mostly in the price before the actual result was announced," Berry said.

Earlier on Monday, the dollar rose to 101.05 yen on trading platform EBS, its highest level against the yen since July 10.

The dollar lost steam after that, however, and later saw a sharp reversal, falling to as low as 99.60 yen. The dollar last stood at 99.92 yen, down 0.6 percent from late U.S. trade on Friday.

Even after Monday's fluctuations, the dollar is up roughly 15 percent versus the yen for the year.

The yen has been pressured by the unprecedented scale of the Bank of Japan's easing, while the dollar has been supported by market expectations that the U.S. Federal Reserve will slow the pace of its monetary stimulus later this year.

Jeffrey Halley, FX trader for Saxo Capital Markets, said Japanese players were spotted selling the dollar versus the yen this morning, adding that traders using algorithmic trading also joined in with yen-buying.

"This has pushed into more stop-losses on dollar/yen and euro/yen in very poor liquidity conditions," Halley said, referring to stop-loss selling of the dollar and the euro against the yen.

The euro fell 0.6 percent to 131.47 yen, down from a two-month high near 132.47 yen set earlier on Monday.

POLITICAL STABILITY

Public broadcaster NHK said early on Monday Abe's Liberal Democratic Party (LDP) and its coalition partner, the New Komeito party, had won 76 of the 121 seats up for grabs in the 242-seat upper house.

With the coalition's uncontested 59 seats, that ensures it a comfortable majority in the upper house, tightening Abe's grip on power.

"With the election now behind us, stability is expected in the Japanese political scene, facilitating Prime Minister Abe's efforts to push through structural reform, tax reform and deregulation," said Tohru Sasaki, head of Japan rates and FX research at JPMorgan Chase Bank in Tokyo.

"While we believe today's result should be positive for the Nikkei index and USD/JPY, we don't expect significant and immediate market impact," he added.

That was partly because the win had been priced in and partly because the Japanese parliament would likely not start debating any new policies until some time in October.

The yen could strengthen if such additional economic reforms are not implemented, said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole in Hong Kong.

"The biggest risk here is that while growth is strengthening and deflation pressures are easing, without reform it's extremely likely that you'll end up back to weaker growth and deflation and I think that will mean a higher yen," he said.

Elsewhere, the euro edged up 0.1 percent to $1.3158.

The Australian dollar rose 0.5 percent to $0.9216 after China's central bank removed controls on bank lending rates, a long-awaited move that signals the new leadership's determination to carry out market-oriented reforms.

China is Australia's single biggest export market and any step to make its economy more efficient is seen as potentially positive for trade.

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