Wednesday, February 17, 2016

FOREX-Yen climbs as risk sentiment sours, China pushes yuan lower

* Dollar/yen pulls away from one-week high

* Softer Chinese yuan fix also weighs on sentiment

* US data, Fed meeting minutes awaited for cues (Updates prices, adds comments)

By Anirban Nag

LONDON, Feb 17 The yen outperformed on Wednesday as a rebound in oil prices fizzled out, weighing on riskier assets and underpinning demand for the safe-haven Japanese currency.

In addition, China fixed a softer mid-point for the onshore yuan, a factor that weighed on riskier emerging market currencies and growth-linked currencies like the Australian dollar.

Against the yen, the dollar fell 0.5 percent to 113.50 yen after reaching 114.875 on Tuesday, the yen's weakest performance in a week.

"The decline in oil prices and China's move to fix a softer mid-point for the yuan are weighing on risk sentiment and dragging down the dollar against the yen," said Yujiro Goto, a currency strategist at Nomura.

"We expect the dollar to trade between 112-114 yen, with the market cautious about driving it towards 110 yen as that could spark off talk of intervention by the Japanese authorities."

The dollar tumbled below 111 yen last week, a 16-month low, after stocks and commodities plunged and expectations faded for another interest rate hike by the Federal Reserve. The dollar rebounded as risk aversion subsided but remains vulnerable to swings in oil prices.

A recovery in crude oil prices from 13-year lows was cut short on Tuesday after top exporters Russia and Saudi Arabia agreed only to freeze output if other big exporters joined them, rather than cutting it outright.

Oil prices were subdued on Wednesday, keeping a lid on stock markets and confirming that risk sentiment was at best fragile amid concern global economic growth was slowing.

Nomura's Goto said risk sentiment would dictate direction for now, and traders would be watching U.S. housing and industrial production data and the minutes of the Fed's January policy meeting later in the day for cues.

Over the next month, though, a focal point for the dollar against the yen is the possibility of more monetary stimulus by the Bank of Japan, said Tan Teck Leng, FX strategist for UBS's Wealth Management in Singapore.

"The very reason why they decided to adopt negative rates in January, when dollar/yen was at 118, is because they wanted to encourage wage growth in 'shunto' taking place this month and next month," Tan said, referring to wage negotiations in Japan.

If the dollar is stuck near current levels against the yen by the time of the BoJ's policy meeting on March 14-15, the central bank might adopt further stimulus, Tan said.

Meanwhile, the low-yielding euro was 0.2 percent higher at $1.1167 and 0.4 percent higher against the pound at 78.22 pence. Sterling traders awaited a British jobs and wages report due at 0930 GMT (Additional reporting by Masayuki Kitano, editing by Larry King)

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