Fed May Carry Yen to Weakest in Five Years: Technical Analysis

The yen may fall to a five-year low versus the U.S. dollar as the Federal Reserve’s decision not to trim asset purchases boosts its funding-currency appeal, according to Bank of America Corp., citing technical indicators.

The yen’s failure to break through key resistance at 97.94 per dollar yesterday confirmed a dollar-yen bull trade that will see the pair test 106 and then 109.80, which would be the yen’s weakest level since August 2008, according to MacNeil Curry, head of foreign-exchange and interest-rates technical strategy in New York at Bank of America Merrill Lynch.

Japan’s currency will be used to fund a recovering carry trade, in which investors borrow in low-interest-rate currencies to buy higher-yielding assets, Curry said.

“The resumption of the carry trade and the appeal of the yen as a funding currency are big drivers behind the yen being weaker than the dollar,” Curry said in a telephone interview. “It’s bullish that we held resistance and rebounded.”

The yen, the only one of the dollar’s 16 most-traded counterparts to fall over the past month, decreased 1.3 percent to 99.22 per dollar in New York. It earlier slipped as much as 1.7 percent, the most since Aug. 1.

The Fed’s decision not to trim the amount of money being pumped into the U.S. economy has prompted investors to seek higher-yielding assets, pushing the UBS AG V24 Carry Index up 1.2 percent today, the most since August 2011.

The surprise move also convinced Bank of America to change its view that the dollar would strengthen against Group of 10 and emerging-markets currencies. “However, there is one exception,” Curry wrote. “Dollar/yen is bullish.”

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index. Resistance refers to an area on a chart where sell orders may be clustered, and support is an area where there may be buy orders.

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