The yen edged higher on Tuesday, and some traders say a massive build-up of offers to sell dollars may test whether Japanese authorities have a line in the sand at 80 for the USD/JPY to launch intervention. The dollar looked vulnerable on charts following its recent drop below trendline support against a basket of currencies.
The euro made the most of the dollar's woes, hovering near its highest in more than four months against the greenback. Yen volatility has eased significantly since late last week, and some analysts said calmer markets in the coming weeks would decrease the need for Tokyo to smooth any appreciation in the Japanese currency, even if the dollar creeps below 80 yen.
The dollar dipped slightly against the yen compared to late US trade on Monday and stood at 80.90 yen, near a session low around 80.85 yen. The yen was broadly higher on the crosses, with the euro dipping 0.2 percent to 115.07 yen.
The yen's surge last week was fuelled in part by speculation that Japanese insurers may repatriate funds from abroad to secure cash for payments to policyholders, in the wake of the massive earthquake and tsunami that struck Japan on March 11.
The true scale of Friday's joint intervention is not yet clear though market estimates put it around $30-35 billion-worth of yen sales, mostly by the Bank of Japan. Dollar/yen implied volatility has retreated in the wake of the surge seen after last week's massive yen selling. One-month vol was around 11.0-12.0 percent, steadying from a pullback from around 20 percent on Thursday.
Lower volatility has provided some opportunity to take on long gamma positions, but traders say the market remains short gamma, leaving options dealers vulnerable to a renewed drop in spot dollar/yen. The euro held steady at $1.4221, hovering near Monday's peak around $1.4241 on trading platform EBS, its highest since November. Euro bulls eyed the $1.4283 peak from November, but traders said US funds were looming with offers above that level, which along with chart resistance was capping the euro's upside.