Dollar eases against Yen as Japanese shares resume slide

Reuters: The Dollar lost ground against the Yen on Monday as another steep fall in Japanese equities prompted investors to unwind their Dollar hedges and head for bonds, extending a trend last Thursday that produced the pair’s biggest weekly drop in a year.

The greenback last bought 101.04 Yen after choppy trade that saw it climb as high as 101.82 in the early morning session and as low as 100.79 as the Nikkei dropped 4%, though shares later narrowed their losses.

However, the Dollar managed to hold above Friday’s trough of 100.68 Yen, with further support at 100.38, the Kijun line on its daily Ichimoku chart. Market participants said a new trend was unlikely to develop on Monday as both US and UK markets are closed for holidays.

“For now the Dollar-Yen is very much tied to the stock market – and not just the Nikkei, but global shares. I don’t think sentiment is turning risk-off, but people are definitely adjusting positions amidst a risk-on environment,” said JPMorgan FX Executive Director Junya Tanase.

“However, in the long-term I think the Dollar-Yen will be supported by a trend for a weaker Yen, because the macro environment has not really changed.”

Tanase added that investors were unwinding their Dollar-hedges on their Japanese equity portfolios as the Nikkei extended its losses from last week, when the index suffered a 7.3% plunge on Thursday that toppled it from a 5-1/2 year high.

“I think that the Nikkei’s moves at the moment are more driven by day traders rather than macro data ... the Japanese market has become like a toy,” said SMBC Nikko Securities Senior Strategist Makoto Noji.  “I think forex traders are more likely to act on the macro data, especially US data. That’s really about whether the Fed will exit QE3 or not.” Yen buying pressure at the end of last week helped to pause the Dollar’s broad gains in the previous fortnight, which were driven by expectations that the US Federal Reserve may wind down its bond-buying program earlier than scheduled.

On Monday, the Dollar index dipped 0.1% to 83.648 after dropping 0.7% last week, when Fed Chairman Ben Bernanke told Congress the Central Bank will not reduce its easing unless the economy showed further signs of improvement.

Japan’s Central Bank, on the other hand, may be expected to ramp up its already aggressive easing program if its economic indicators do not pick up, according to Sumitomo Mitsui Trust Senior Market Economist Ayako Sera.

“A lot of people will be focusing on Friday’s consumer price index data after one BOJ member said the 2% target looks a bit difficult to achieve,” she said, referring to minutes from the BOJ’s last policy meeting released on Monday.

The Euro edged 0.1% off Friday’s late US levels to US$ 1.2929 after rising 0.7% last week, its first weekly gain in three weeks, supported by signs of improvement in German business morale on Friday.

The next line of resistance for the common currency is said to lie around its 20-day moving average at US$ 1.2992.

Against the Australian Dollar the Euro edged down 0.3% to 1.3416, staying below stops around 1.3500 cited by market participants. The common currency has gained just over 10% against the Aussie since 3 April, when it hit a nearly five-month low of 1.2213.

Against the US Dollar, meanwhile, the Aussie continued to pitch downwards, losing 0.1% to US$ 0.9631. Its 7% tumble this month has been led by concerns about sluggishness in the Chinese economy that have also hit commodity prices.

If the Aussie remains more than 6.6% down on the month by Friday, this would mark its worst month since September 2011, when it fell 9.7%.