By Masataka Nakamura Tokyo, June 25 (BridgeNews) - The dollar/yen lost ground Monday mainly on long liquidation pressures. The expected victory of Japan's Liberal Democratic party at Tokyo local election failed to inspire foreign exchange traders. Euro/dollar moved higher, on speculative buying and stop loss buying above 0.8580. However, trading soon settled.
Japan's Liberal Democratic party's victory in a local Tokyo election Sunday had little impact on the yen, dealers said. The LDP's performance bodes well for the Upper House election on July 29. However, the LDP's victory has been largely factored into the market in light of the popularity of Prime Minister Junichiro Koizumi. In addition, yen dealers are more focused on weak economic fundamentals rather than the political situation.
Japanese Prime Minister Junichiro Koizumi survived the first test of his popularity as his fellow party members rode his coattails to victory in Tokyo's municipal election Sunday. His Liberal Democratic Party won 53 seats in the 127-seat Tokyo assembly, five more than its previous total and exceeding the party's target of 50 seats, a party spokeswoman speaking on condition of anonymity said. All but two of the 55 LDP candidates won seats.
After the market failed to test the 124.50 level, long liquidation pressures, mainly from U.S. names were putting downside pressures on dollar/yen amid relative thin market conditions. Dealers said that the market found difficulty in testing the top side, because of technically overbought conditions for dollar/yen. Overall, dollar/yen trading market conditions were sluggish in small volume. Masakazu Bunno, assistant general manager of the international trading department at Sumitomo-Mitsui Banking Corporation said that the market was cautious ahead of the key events this week such as FOMC meeting, BOJ board meeting, and U.S.-Japan summit meeting.
Meanwhile, the underlying market sentiment remains bullish toward the dollar/yen. There is talk U.S. speculative players and other short-term players are showing buying interest for dollar/yen from the 124.00 area, which is seen giving support to the pair. Market sentiment remains bullish toward dollar/yen, on the view that yen should reflect weak economic fundamentals in Japan while the U.S. signals it will allow yen weakness as a result of structural reform. At present, where to buy dollar/yen, rather than whether to buy the pair, appears to matter for foreign exchange traders.
The 1-week dollar/yen option volatility remains well above the 11.00% level, and higher than the rest of the volatility curve. This high level of option volatility can be attributed to strong demand for the 1-week option, ahead of upcoming key events this week.
Euro/dollar moved higher Monday morning, helped by buying from speculative players. Stops were triggered above the 0.8580 area, which was seen underpinning the pair. In addition, the break of the key 0.8580 area prompted bandwagon buying from inter-bank community. Some dealers also see the fundamental justification for euro's strength against the dollar this week. Bunno at Sumitomo-Mitsui Banking Corporation said that the expectations of the easing by the Federal Reserve Board Thursday undermines the market tone toward the dollar against the European currencies to some extent.
Meanwhile, euro/dollar was well capped above the 0.8600 area during Asian trading. There is talk of selling interest near the 0.8620 area, discouraging the upward momentum. In the asfternoon session, euro/dollar moved listlessly in a tight range.
Euro/yen broke the 106.75 area to hit a high of 106.85, the highest since May 22. The rise was largely shadowed by a gain in the euro/dollar, though some buying from U.S. names was spotted. Despite the technical break, there is a feeling that profit-taking selling pressures, coupled with corporate selling pressures, could slow upward momentum of the pair, at least in the short term. In addition, the top heaviness of the euro/dollar from the current 0.8600 region makes dealers cautious to test the top side of the cross.
Japan's economic data failed to inspire the market. Japan's May corporate service price index (CSPI) averaged 95.9 (1995=100), down 1.0% on the year and 0.5% on the month, the Bank of Japan said Monday. Year-on-year falls in the CSPI have been accelerating recently. The CSPI declined 0.3% in January, 0.7% in February, 0.8% in March and 0.7% in April. Sales at Japanese department stores nationwide fell 0.4% in May from a year earlier to 670.4 billion yen, the Japan Department Stores Association announced Monday. Sales declined year-on-year, after showing no change in April.
The following news failed to have an immediate impact on the market, though they attracted attention from some dealers: --Italian Prime Minister Silvio Berlusconi said the new center-right government expects to present the four-year macroeconomic plan, known as the Documento di Programmazione Economica e Finanziaria (DPEF), "around 10 July," newspaper La Stampa cited the premier as saying in an interview. Berlusconi also said the government was concerned by public accounts.
--U.S. Treasury Secretary Paul O'Neill reiterated Sunday that based on a historical perspective, it takes some time for interest-rate cuts from the Federal Reserve to jump-start a sputtering U.S. economy. O'Neill said on the ABC talk show "This Week" that consumer confidence remains strong and indicated he remains confident the economy will pull out of its tailspin soon.