By Vicki Schmelzer

NEW YORK (MNI) – Dollar-yen maintained a toe-hold above the psychological
Y80 mark in afternoon action Wednesday, with the pair underpinned by
expectations of new BOJ asset purchases but weighed by fears about the U.S.
fiscal cliff.

While overall dollar bearishness due to the fiscal cliff may prevent a
larger dollar-yen rally, Japan-specific concerns nevertheless suggest a retest
of the November highs around Y80.65-70, if not a move to the April 20 peaks near
Y81.75-80, analysts said.

Earlier Wednesday, in a rare announcement during a parliamentary debate,
Japanese Prime Minister Yoshihiko Noda said that he would dissolve the lower
house of the Diet on Friday if opposition parties agreed to the ruling
coalition’s plan to cut parliamentary seats in electoral reform.

In response, Shinzo Abe, who heads the main opposition Liberal Democratic
Party, told reporters after the debate that the LDP will endorse the reform
plans in parliament, according to public broadcaster NHK.

Now that Noda is set to dissolve the lower house on Friday, national
elections for the 480-seat House of Representatives are likely to be held
December 9 or December 16. (See details on MNI mainwire at 2:51 a.m. ET).

“The LDP is expected to win the general election … if the Diet is indeed
dissolved this Friday,” said Osamu Takashima, G-10 strategist at CitiFX in a
research note.

“LDP leader Abe, who would be the incoming LDP prime minister, is a
politician who belongs to the economic growth camp and a strong proponent of
aggressive easing by the BOJ,” he said.

In addition, Abe “is a right-wing and diplomatically hawkish politician,”
which does not bode well for relations between China and Japan and could mean
reduced Japanese exports to China, he said.

“The widening trade deficit and Abe’s monetary policy stance will both be
JPY negative,” Takashima said.

Because Japanese exporters have already nearly finished their forward FX
hedging for fiscal year 2012 (ends March 2013), any future dollar selling from
exporters is likely to be sluggish until the next fiscal year’s budget rate is
set next January or early February, he said.

“Although the recent high at mid-Y80 is likely to function as strong
resistance in the near-term, JPY may still weaken further as the changeover to
an LDP administration approaches,” Takashima said.

The “yen negative prospects” of an LDP win “would be magnified” by
prolonged concerns about the lack of medium-term fiscal consolidation, said
Ashraf Laidi, chief global strategist at City Index in London.

“Political disarray and looming escalation in asset purchases are seen
compounding recent yen losses following the latest figures showing Japan’s 0.9%
GDP contraction in Q3 could well drag the country closer to its fifth recession
in 15 years,” he said.

Laidi looked for further dollar-yen gains, but stressed that “the lingering
uncertainty from fiscal cliff resolution and prospects for more aggressive
policy steps from the Fed continue to impose a lingering U.S. dollar risk.”

Larger resistance in the Y81.50/70 (prior peaks and 61.8% Fibonacci
retracement of the March/September decline) is likely to contain any larger
dollar-yen run-up, he said.

Andy Busch, global currency and public policy strategist at BMO Capital
Markets, saw scope for the BOJ to embark on a Swiss-style intervention, “where
they sell ‘unlimited yen’ to keep the yen weak enough to spur export growth.”

“One twist to keep in mind is that to avoid riling trade partners who could
use WTO rules to punish currency manipulation, the BOJ might buy
foreign-currency bonds as part of its QE program,” Busch said.

UBS strategists maintained that the U.S. fiscal cliff will matter more than
Japanese politics to dollar-yen direction.

“We would be wary of taking our eyes off the bigger picture – U.S. yields
are depressed and are likely to remain so until clear signs of political
compromise emerge on the U.S. fiscal cliff issue and this is likely to drag
USDJPY lower as year-end approaches,” they said in a note.

UBS pointed to comments made overnight by Federal Reserve Vice Chair Janet
Yellen that “sounded even more dovish than current Fed guidance” as evidence
that “the prospect of accommodative Fed policy for longer should not be
dismissed either.”

In terms of technicals, George Davis, chief technical analyst at RBC
Capital Markets, was watching a “key quadruple top” at Y80.62 for dollar-yen
direction.

“A daily close above this level will be required in order to produce the
bullish resolution of a rectangular consolidation pattern that has been in place
since May-June, with this development shifting the focus up to Y81.77 initially,
followed by Y83.30 thereafter,” he said.

In addition, the “50% Fibonacci retracement of the March-September selloff
is located just above the quadruple top at Y80.71, with 61.8% retracement at
Y81.52 and 76.4% retracement at Y82.53,” he said.

On the downside, support for dollar-yen comes in at Y79.31 and Y78.46 (“the
top of the Ichimoku Cloud”), Davis said.

Dollar-yen was trading at Y80.17 Wednesday, after holding in a Y79.39 to
Y80.31 range

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

–email: vschmelzer@mni-news.com

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