By Masataka Nakamura
Tokyo, June 11 (BridgeNews) - The yen was offered on weak Japan GDP data released Monday which showed a 0.2% drop in January-March from the previous quarter, the upward momentum of the dollar/yen was slowed by option-related selling pressures near the 121.30 area. Sterling gained ground on a report that U.K. Chancellor of Exchequer, Gordon Brown, was skeptical about the early U.K.
entry into the euro. Euro/dollar was sandwiched by euro buying against yen and euro selling against sterling.
The yen was offered, after Monday morning's release of Japan's January-March quarter GDP data which showed weaker-than-expected growth. Both U.S. and Japanese short-term players sold yen against dollar and euro, with a trigger of stops at 121.20 for dollar/yen and 103.10 for euro/yen.
Japanese exporters were on the selling side of the dollar and euro against yen, but their selling was not sufficient to contain a fall in the yen.
Japan's January-March real gross domestic product fell 0.2% on the quarter, or an annualized 0.8%, on a seasonally adjusted basis, after showing a revised 0.6% increase in the previous quarter.
Capital investment, housing construction and net exports contributed to the drop in the GDP, the Cabinet Office said. The GDP was below the market average outlook of a 0.2% gain, or an annualized 1.0% rise. The data undermined the tone for the yen.
After the GDP release, Heizo Takenaka, Japan's minister for economic and fiscal policy, said he was not mulling a policy for boosting public demand, and that the government would stick to its structural reform drive, as GDP figures are within government expectations. Takaneka also mentioned that personal consumption was weak but the fall has not accelerated. Capital spending was slowing faster than expected, he said. Yasuji Yamanaka, deputy general manager of treasury department at Nikko Trust and Banking, said that a quarterly 0.2% fall in GDP in January-March quarter was not far from market expectations. However, the yen tone was still negative after the data release, because it showed a minus growth during the quarter and the October-December quarter GDP was revised down, Yamanaka said.
Meanwhile, the fall of the yen was slowed by option gamma plays ahead of the 121.30 strike option. There is talk that large amounts of options at the strike of 121.30 will expire Thursday. Option players were offering the dollar/yen as the pair approached the 121.30 area and stepped up the selling above the 121.30 area. The selling appears to have slowed an upward momentum of the pair to some extent.
Euro/dollar was mixed by euro selling against sterling and euro buying against yen. Euro/dollar flow was relatively light in Asia Friday. Overall, euro/dollar hovered around the 0.8500 listlessly for the rest of the Asian session. There was a feeling that euro/dollar is likely to be susceptible to cross activity in the short run.
Cable raced ahead, helped by a Sunday Times' report that U.K. Chancellor of Exchequer Brown said there would be no early U.K. push to join euro.
Stop-loss buying was also triggered at 1.3860, putting extra upward pressures on Sterling/dollar. In addition, Sterling buying pressures against euro underpinned the pair.
U.K. Chancellor of Exchequer Gordon Brown suggested over the weekend that there would be no early U.K push to join the euro, the Sunday Times said.
According to the paper, other officials were also skeptical about the early entry. Jack Straw, the new foreign secretary, said joining the euro was a low priority for the chancellor. Brown's aides also said that the euro referendum could be years away.
In the Asian afternoon, U.S. names were spotted buying the euro/yen, underpinning the cross. This flow also strengthened the dollar/yen and euro/yen as well. Technical strength also inspired traders to buy euro/yen. In addition, some dealers also said that Liberal Democratic Party Secretary General Taku Yamasaki's call for further effective monetary easing was supportive for the cross. For the top side, the 103.40-50 area was being watched closely as a resistance.
Japan's LDP secretary general Taku Yamasaki said there is need for more effective money easing policies. Yamasaki did not elaborate on the policies, but quantitative easing is believed to be one of the policies that he might have in mind.
For the option market, short dated dollar/yen option volatilites fell Monday, on unwinding of gamma long positions. The 1-week option volatility on USD/JPY is currently around 8.40% down from 8.7% later in the New York session Friday. Dealers said that gamma long positions are large at the 120's and the 121's, which were seen weighing on option volatilities. Dealers see further downside risk of option volatility, if dollar/yen sticks to the current region.