* Intervention worries make eur/yen easier sell than dlr/yen
* Euro/yen’s fall below 110 yen leaves 8-1/2 yr low in sight
* 100 yen could become a key level; Y105 watched near-term
LONDON, Aug 16 (Reuters) - Investors may look to pile into the yen against the euro rather than the U.S. dollar, as worries about intervention by Japanese authorities make them jittery about stretching short positions in the greenback.
The dollar's broad weakness against the yen JPY= will remain the focus of any efforts by the Japanese to curb yen strength, even as European officials appear coy towards supporting action.
An unnamed European official said last week foreign exchange intervention “would not be welcomed in Europe” and that joint action to curb yen gains was not on the cards. [ID:nTST002429]
The focus on the dollar’s drop to 15-year lows below 85.00 yen -- seen as a key level -- means some market participants may be missing the fact that the euro’s falls lately have been even steeper, sometimes driving broader moves in the currency market.
“At times it has been euro/yen flows that have been the key driver,” said Michael Derks, chief strategist at FXPro.
“People will be quite conscious that anything much below 85 in dollar/yen will be pretty critical for Japanese officials and if traders want to express a positive yen view they are more likely to do it through euro/yen than through dollar/yen”.
Japan’s Prime Minister Naoto Kan has expressed concern about the yen’s strength, and Monday’s weak Japanese growth figures will only add to those worries. [ID:nTOE67D00G] [ID:nTOE67901S]
Japanese authorities' previous intervention in the euro/yen EURJPY=R pair has been small, however, and only in conjunction with intervention on dollar/yen. Of the 35 trillion yen spent by Tokyo when it last intervened in FX markets over a 15-month period ending in March 2004, just 173.2 billion was in euro/yen.
FALLS TOWARDS 100 YEN?
Dented by renewed concerns about problems on the periphery of the euro zone and a spike in investor aversion, euro/yen shed more than 3 percent last week. It continues to trade below 110 yen, leaving June’s 8-1/2 year low of 107.32 in sight.
“It is not just the U.S. that Japan exports to. Europe is a large part of their trade as well and the euro/yen story is not far from being as important as the dollar/yen story,” said Audrey Childe-Freeman, currency strategist at Brown Brothers Harriman.
“Euro/yen is very difficult to assess because there is less intervention history to go on, but in terms of psychological levels, 100 yen has to be important.”
A break below 107.32 would leave the 100 yen level in sight -- potentially an extremely painful level for Japanese exporters given the concurrent fall in dollar/yen. Before that, 105 yen is likely to be a near-term target.
Technically, the euro/yen cross appears to be under pressure. Daily Ichimoku charts are flashing a sell signal, with the euro having dropped below the cloud and into bearish territory.
Support is seen just above 105 yen and Japanese authorities were reported to have intervened at that level in November 1999.
Commerzbank technical analyst Axel Rudolph said once the euro hit 8-1/2 year lows, it could find support between 106.84 -- the November 2003 low -- and the September 2001 low of 105.53.
“As long as we stay above 105.50 the BoJ might not necessarily intervene straight away. But if that goes there is not much to prevent a move down to 100”.
Recent positioning data shows speculative investors sharply increasing bets on the yen gaining [IMM/FX]. One-month euro/yen risk-reversals EUJP1MRR=ICAP -- a measure of the premium required to hold a put or a call in a currency pair -- continue to show a bias for more euro/yen downside.
Implied euro/yen volatilities also suggest expectations of future sharp moves have increased. One-month implied euro/yen volatility EURJPY1MO= jumped more than 10 percent on Wednesday, its biggest one-day percentage gain since early June. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic on euro/yen implied volatility: here ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Additional reporting by Tamawa Desai; graphic by Scott Barber; editing by Andrew Heavens
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