By Vicki Schmelzer

NEW YORK (MNI) – Dollar-yen blasted higher Thursday, taking out various key
resistance levels along the way to test nearly a seven-month high near Y81.46
before stalling.

A clear-cut break above the next important resistance level around Y81.50,
the 61.8% Fibonacci retracement of the decline from the March peaks to the
mid-September lows, could be the start of move back to March highs near Y84.20
in the sessions to come, analysts said.

The catalyst for the run-up in dollar-yen came from overnight comments by
Japanese opposition leader (LDP) Shinzo Abe, who said the Bank of Japan should
lower benchmark interest rates to zero and implement unlimited easing in order
to bring inflation back to a 2%-3% target.

Abe’s Liberal Democratic Party is expected to win the snap election (likely
in mid December) that would follow if the lower house of the Diet is dissolved
Friday as expected.

As the new Prime Minister, Abe would likely also appoint a more dovish BOJ
Governor, when current Governor Masaaki Shirakawa’s term ends next April.

Abe’s remarks emboldened yen bears and sent dollar-yen and yen crosses
flying earlier.

Dollar-yen was trading at Y81.14 Thursday afternoon, on the high side of a
Y80.12 to Y81.46 range.

Up until today, this month the pair has traded in a Y79.06 (Nov. 9) to
Y80.67 (Nov. 2) range.

“Next USD-JPY resistance is at Y81.50, the 61.8% (Fibonacci) retracement of
this year’s Y84.18 to Y77.13 decline, and clearing that level would
theoretically increase the scope for a complete retracement of that sell-off,”
said Bob Lynch, head of G-10 FX strategy at HSBC.

A clear-cut break above Y81.50 “would indeed enhance the upward momentum,
and open scope for initial gains of at least another big figure,” he said.

Lynch doubted, however, that this was the start of a new larger uptrend for
dollar-yen and stressed that “we are not necessarily going back to Y84.00″.

Nevertheless, he acknowledged the potential for the trend to continue in
the near-term, adding “momentum builds on itself.”

Euro-dollar watchers were keeping close tabs on the euro-yen, which
revisited monthly highs near Y104.00 earlier.

Euro-yen held at Y103.63 in afternoon action, on the high side of the day’s
Y102.03 to Y103.98 range.

A decisive push above recent peaks in the Y104.00-Y104.05 range would
target a return to the Fall cross peaks at Y104.60, seen October 23.

HSBC’s Lynch saw Y104.60 as one of several key cross resistance levels
(AUD-JPY Y84.16, GBP-JPY Y129.65, CAD-JPY Y81.45) to watch for larger yen
direction.

“If those range-tops break, it will increase the risk for further declines
in the JPY more broadly, including against the USD,” he said.

“But if they hold, it would be a potentially important restraining factor
for USD-JPY,” Lynch said.

Euro bulls were eyeing a retest of the 200-day moving average in EURUSD
($1.2811) now that euro-yen has seen a clean break of its 200-day moving
average, currently at Y102.13.

The push higher in the cross was driven not only by a potential shift in
Japanese fundamentals (BOJ easing, lower rates), but also jitters about the U.S.
fiscal cliff.

While mounting concern about the fiscal cliff have kept the greenback on
the defensive overall in recent sessions, Japanese investor actions may be
acting to underpin euro-yen.

Barclays Capital’s weekly bond survey, released earlier Thursday, showed
that 60% of Japanese investors fear the realization of the fiscal cliff.

“Among the regular surveys, the DI measuring the relative preference for US
Treasuries versus European government bonds (percentage preferring former minus
percentage preferring latter) showed the largest movement, falling to -20.0 from
+9.1 last week, matching the level of strong relative preference for European
government bonds not seen since March 2010,” said Barclays Capital strategists
Yoshio Takahashi and Shinichiro Kadota in a research note.

Japanese investor share citing a preference for U.S. Treasuries fell to
15.0% from 31.8%, the lowest levels since February 2010, while the share citing
a preference for European government bonds rose to 35.0% from 22.7%, the highest
level since April 2010, they noted.

“Factors behind this are that whereas the uncertainty regarding the fiscal
cliff was not resolved after the election (details below), the European
government bond market regained stability after the the ECB’s announcement of
OMT in September (despite the lack of an actual request for assistance),”
Takahashi and Kadota said.

** MNI New York Newsroom: 212-669-6430 **

–email: vschmelzer@mni-news.com

[TOPICS: M$J$$$,MGJ$$$]