LONDON: Traders who have missed the chance to get long of dollars against the Japanese yen might consider buying dips, as the drivers behind a weaker yen remain in place.
A retracement toward 79.80-90 yen would see technically-driven bids around the 55-day moving average (currently 79.92) with talk of Japanese importer demand for greenbacks in the 79.50-70 yen area offering the prospect of further support for the US currency.
A move toward 81.57 yen, the roof of dollar/yen's daily ichimoku cloud, widely followed indicator on technical charts, may be in the offing.
Dollar longs will also be closely watching for a further bullish signal in a close above 80.55 yen, the current ceiling of its weekly ichimoku cloud.
Just three weeks ago, with the dollar at a 3 1/2-month low of 77.65 yen, the talk was of Japanese authorities intervening to curb their currency's strength but signs of global economic weakness have seen investors flock to the safe-haven dollar, pushing it above 80 yen.
The consequences for the yen of Wednesday's US Federal Reserve policy decision are also likely to be further weakness against the dollar.
Under the extended Operation Twist, the US central bank will continue to replace its holdings of short-term debt with longer-term securities, hoping to press longer-end borrowing costs lower.
The fact the Fed opted for this modest monetary easing step, rather than a fully fledged third program of straightforward bond purchasing, gives the dollar some support, particularly against the yen.
Given long-standing ultra-low interest rates in Japan, investors there are very sensitive to any changes in US monetary policy that might suggest the greenback is a reasonable investment destination.
Developments in Japan support a similar conclusion. On June 12, the International Monetary Fund urged Japan to pass laws to raise the sales tax to help cut public debt.
Subsequently, Japan's ruling party and the opposition agreed in principle to vote on Tuesday on a bill doubling the sales tax, and extended the parliamentary session to Sept. 8 to allow time to enact the legislation.
This is a potential breakthrough as short-lived governments, political gridlock and public opinion have previously ensured such a fiscal tightening was blocked.
The quid pro quo for fiscal tightening is monetary easing and the IMF has already said the Bank of Japan (BoJ) could ease policy further by increasing asset purchases.
A steady-as-you-go policy by the Fed combined with the possibility of some additional easing from the BoJ underpins the logic behind the recent rise in the dollar against the yen.
Much depends on Tuesday's vote in the Japanese parliament, but if Prime Minister Yoshihiko Noda's plans to raise the sales tax stays on track, the argument for being long dollars against the yen remains solid.
— Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.
