Yen, Dollar inches higher but seen vulnerable

by on January 3, 2013 8:40 am GMT

The yen and dollar rose versus the euro as investors turned their focus to whether U.S. policy makers can reach an agreement to raise the nation’s debt limit.

The U.S. Treasury will probably exhaust what it called “extraordinary” measures by late February or early March to keep funding the government after the nation hit its $16.4 trillion debt ceiling on Dec. 31. The Japanese currency strengthened against most major counterparts amid signs it had been oversold.

The U.S. debt ceiling “is going to potentially start to become a bit more of a focus for market sentiment in the coming weeks,” said Jonathan Cavenagh, a currency strategist in Singapore at Westpac Banking Corp. (WBC) “It’s probably going to be more of a positive U.S. dollar story” and “the yen could also benefit,” he said.

Japan’s markets are shut today for a holiday.

The yen’s 14-day relative-strength index is at 23 against the euro and 17 versus the dollar. Readings below 30 signal that an asset price may be set to reverse course.

The U.S. Congress passed a bill that makes permanent for most workers income-tax cuts that were passed under President George W. Bush, while reductions in the rates for top earners will expire. The deal averted $600 billion in automatic tax increases and spending cuts, known as the fiscal cliff, that might have thrown the U.S. economy back into recession.

‘Next Crisis’

The International Monetary Fund said yesterday that the U.S. economic recovery would have been derailed if the fiscal cliff issue had not been resolved. The Washington-based fund also said the U.S ought to raise the debt ceiling “expeditiously.”

“The next crisis will revolve around the debt ceiling, federal government funding and the consequential threats and theatrics that are associated with the threats of a government shutdown and possible debt default,” Ward McCarthy and Thomas Simons, economists in New York at Jefferies Group Inc., wrote in a research note dated yesterday.

BOJ Policy

The yen earlier touched 87.36 per dollar, the weakest since July 29, 2010, amid speculation the Bank of Japan will heed government calls to increase money printing to stoke inflation. BOJ Deputy Governor Kiyohiko Nishimura speaks tomorrow ahead of the BOJ’s first policy meeting this year on Jan. 21-22.

Japan’s newly installed Prime Minister Shinzo Abe said in a New Year statement on Jan. 1 that the most urgent issue for his country was to break out of currency appreciation and deflation. “Bold” monetary policy is one of the three prongs of his economic measures, he said.

While the yen dropped 11 percent last year versus the dollar, the biggest annual slide since 2005, it is still about 16 percent stronger than its 10-year average of 101 per dollar.

“The Japanese yen is very overvalued still,” said Thomas Averill, managing director in Sydney at Rochford Capital, a currency and interest-rate risk management company. “There’s quite a lot of weakness in the yen to come.”

ADP Research Institute may say today that companies in the U.S. added 140,000 workers in December, up from a 118,000 increase the prior month, according to the median estimate of economists surveyed by Bloomberg News. The data will be followed by a government report tomorrow projected to show payrolls rose 150,000 workers last month, the most since August.

U.S. ‘Resilience’

“As we head for the ADP release, we may once again be surprised by the resilience of the U.S. economy,” Societe Generale SA strategists led by Kit Juckes, the head of foreign- exchange research in London, wrote in a research note yesterday. “The market is likely anticipating that the supply side may eventually play catch-up after presumably delaying some activity due to the fiscal cliff risks. This is a recipe for buying prudently the dollar-yen on dips.”

The Canadian dollar maintains an “impulsive bias” in a rally against the yen, and the focus is now on the 89 to 90 yen area, Niall O’Connor, a New York-based technical analyst at JPMorgan Chase & Co., wrote in a report yesterday. This zone includes the 2011 peak reached in April as well as the 76.4 percent retracement from an April 2010 high to an October 2011 low, according to the analyst.

The so-called loonie has risen 17 percent in the past year versus the yen. It lost 0.1 percent to 88.58 yen today.