Yen May Fall, Euro Rise as Risky Trades Revive, Citigroup Says

By Candice Zachariahs

Jan. 29 (Bloomberg) -- The Japanese yen may weaken against the U.S. dollar and eight more of the world’s most-traded currencies as riskier foreign-exchange trades revive, Citigroup Inc. analysts said, citing technical charts.

The U.S. dollar looks to be forming a so-called double bottom, meaning any advance above 94.65 yen probably would be followed by a surge to as high as 102 yen, analysts led by New York-based Tom Fitzpatrick, Citigroup’s chief technical analyst, said in a report dated yesterday. The dollar rose 0.2 percent to 90.43 yen as of 10:10 a.m. in Tokyo.

Yen weakness will be driven by “non-foreign exchange dynamics” said Fitzpatrick in an e-mail today. Higher government bond yields, equities and commodities along with lower volatility could see “a number of 10 percent moves in yen crosses,” he said.

The euro slipped to 118.66 yen from 118.88 yesterday. The 16-nation currency may advance 10 percent to 130 yen, with a break above 131 opening up a target of 150 yen, the analysts said. The currency may benefit from European policy makers’ reluctance to lower interest rates as far as their Japanese and U.S. counterparts.

Yields on German two-year notes rose to the highest in three weeks on Jan. 27 before slipping to 1.61 percent yesterday. U.S. two-year Treasury yields advanced to as much as 0.93 percent yesterday, the highest since Dec. 9.

‘Very, Very’ Low Rates

“Very, very low interest rates have some inconveniences that the Governing Council is trying to avoid,” European Central Bank President Jean-Claude Trichet told Bloomberg Television yesterday. The ECB has cut its main interest rate by 2.25 percentage points since early October to 2 percent, matching a record low. The central bank’s board next meets Feb. 5.

U.S. policy makers yesterday left their benchmark interest rate as low as zero and said the Federal Reserve is prepared to buy Treasury securities to resuscitate lending. Any purchases before the Federal Open Market Committee’s next meeting in March would need a vote to authorize the action.

The yen weakened against the dollar for a second day after the Standard & Poor’s 500 index capped its longest streak of gains since November, advancing for a fourth day. The VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock market price changes that is used as a measure of risk aversion, slid to its lowest close since Jan. 7.

A double bottom forms when a security makes two consecutive troughs of about the same depth, and indicates potential for a rebound.

Similar patterns are evident for currencies in countries with higher-yielding assets, pointing to possible rallies by the Australian dollar and the euro against the yen and the Swiss franc and for the South African rand against the greenback, the Citigroup analysts said.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net