* Euro hovers near $1.27, resistance layered above that
* Gap widens between 1-mth and 1-yr risk reversals
* High-yielders hold gains on improving risk appetite
By Rika Otsuka
TOKYO, July 9 (Reuters) - The euro held near two-month highs
on Friday, while the yen was under pressure as investors cut
long positions and veered towards high-yielding currencies on
improving risk appetite.
The euro was little changed on the day at $1.2694 <EUR=>,
after advancing nearly 0.5 percent on Thursday and jumping more
than 1 percent against the low-yielding yen <EURJPY=R> on a
break of significant resistance that took it as far as $1.2713.
Some profit-taking in Asian time pinned it below Thursday's
high. It then faces initial resistance from a downtrend line off
its December high, which comes in at roughly $1.2715-25, and at
more chart points around $1.2767 and $1.2780.
"Market players are likely to cover more short euro
positions, with charts signalling the euro has hit a bottom
against the dollar and the yen," said Masahiro Kami, capital
market analyst at Sumitomo Mitsui Banking Corp.
"At the same time, the euro's rebound may be limited as
investors are unlikely to buy back all euro positions they cut."
It was supported on Thursday by a cautiously optimistic
European Central Bank [], strong European
industrial production data and a sizable drop in U.S. initial
unemployment claims. [].
Clarity on European bank stress tests also helped the euro,
as well as bank shares, as investors realised criteria for them
were no more onerous than markets expected. []
Chartwise it has scope to reach $1.2767 as the target off an
A-B-C wave sequence starting from the euro's four-year low at
$1.1876, with the C-wave starting at $1.2152. The $1.2780 area
is a 50 percent retracement of its fall from mid-April to the
June low.
But traders and strategists remain wary of going long euros
in a big way, given the fiscal and debt problems that hobble its
economy, and some expect bigger profit-taking and a sell-off
soon. Support is seen at the 55-day moving average of $1.2481.
"Even though the euro has had a bit of a renaissance, the
longevity of these gains is open to question, and is reflected
in a wide gap between the one-month and one-year risk
reversals," David Watt, senior currency strategist at RBC
Capital.
"Short-term bearishness has dissipated to some extent, but
longer-term markets are still prepared to pay a hefty premium
for puts over calls."
Indeed, while 1-month risk reversals <EUR1MRR=ICAP> have
fallen nearly 55 basis points to quote at 0.85/1.35 percent
since the end of June, 1-year risk reversals <EUR1YRR=ICAP> have
lost about 25 basis points in the same period.
The euro touched a two-week high of 112.57 yen <EURJPY=R>
after jumping more than 1 percent on Thursday.
The yen <JPY=> was under pressure as investors cut long
positions and shifted funds towards high-beta currencies like
the Australian <AUD=D4> and New Zealand dollars <NZD=D4>.
The dollar inched up 0.3 percent to 88.61 yen <JPY=>, having
gained about 0.7 percent on Thursday. It has managed to pull
away from a seven-month low of 86.96 yen struck on July 1.
Japanese importer demand lifted the dollar against the yen
in early trade, traders said.
The ruling Democratic Party of Japan is looking increasingly
likely to miss its target for seats in an upper house election
at the weekend, an outcome that could weaken the prime minister
and complicate policy-making. []
But analysts said the yen's slippage stemmed from a higher
appetite for riskier currencies, although a worse-than-expected
election outcome for the DPJ could briefly be yen-negative.
The yen had made solid gains against the greenback earlier
this month on the back of growing worries about an economic
slowdown in the United States and falling stock markets <.SPX>.
But those worries seem to have taken a back seat, with some
of the gloom lifting due to expectations of strong earnings in
the U.S., boosting risk appetite, although analysts cautioned
sentiment is fragile. The market will be watching a host of
Chinese indicators due over the next week, starting with trade
data on Saturday and including second quarter GDP on July 15.
The Australian dollar was flat at $0.8771, but off a
two-week high of $0.8792 hit on Thursday. Momentum towards the
Aussie was strong given a solid jobs reading which brought back
the risk of near term rate increases.
The Australian dollar rose 0.3 percent to 77.69 yen
<AUDJPY=R>, having surged 5 percent this week.
The Obama administration declined to label China a currency
manipulator in a report on Thursday, spurring fresh calls from
U.S. lawmakers for tough new steps to pressure Beijing.
[]
Traders said Washington's decision had little impact on
foreign exchange rates as investors saw the yuan's weakness as
no longer an internationally hot issue after China last month
freed its yuan from a nearly two-year-old peg to the dollar.
(Additional reporting by Anirban Nag in Sydney and Charlotte
Cooper in Tokyo; Contribution by Reuters FX analyst Krishna
Kumar in Sydney; Editing by Michael Watson)
