Yen Near Record Low Versus Euro as Investors Add to Carry Trade
By Ron Harui and David McIntyre


U.S. one dollar coins are displayed on twenty euro notes
July 16 (Bloomberg) -- The yen traded near a record low against the euro on speculation investors will keep borrowing the currency to buy higher-yielding assets in so-called carry trades.

The currency weakened against New Zealand's dollar as an inflation report in that nation increased prospects the central bank will raise its benchmark 8 percent rate, which compares with Japan's 0.5 percent. The yen also fell after an earthquake shook central Japan, causing the closure of three nuclear reactors.

``There's no change in the carry trade trend and the bias for selling the yen,'' said Takashi Yamamoto, chief dealer of treasury at Mitsubishi UFJ Trust & Banking Corp. in Singapore. ``The quake may adversely affect the Japanese economy. Interest rates will probably stay low.''

The yen traded at 168.25 per euro at 10:45 a.m. in Singapore from 168.05 late in New York on July 13, when it reached a record low of 168.95. It was also at 122.05 to the dollar from 121.93. It may decline to 122.50 against the dollar and 168.50 per euro today, Yamamoto said. Trading may be less than usual because of a public holiday in Japan.

Against the yen, the New Zealand dollar has risen 3.1 percent in the past month as investors sent money overseas in search of higher returns. The yield spread between two-year New Zealand and Japanese bonds widened to 6.597 percentage points today, the most since June 2000, after a New Zealand government report showed consumer prices rose 1 percent in the second quarter, more than expected by economists and the central bank.

New Zealand's dollar traded at 96.12 yen from 95.98 on July 13. It reached 96.98 on July 6, the strongest since June 1986. Australia's dollar, another favorite of carry trades, was at 106.33 yen from 106.21 in New York July 13, when it touched 106.40, the highest since September 1991.

``It looks like everybody wants to buy the Australian dollar these days,'' said Matthew Jones, regional sales manager at Travelex Australasia Group in Sydney. ``It's the carry trade.''

U.S. Reports, Bernanke

The dollar also traded near a record low against the euro before U.S. reports on inflation and housing and Federal Reserve Chairman Ben S. Bernanke's semi-annual testimony before the House Financial Services Committee on July 18.

The U.S. currency's gains against the yen were limited after Iran last week asked Japanese refiners to use their own currency to pay for crude oil purchases. The Iranian central bank in March said it was cutting its U.S. dollar reserves.

``We're definitely looking at a step down in the U.S.'' economy, said Tony Morriss, a currency strategist at Australia New Zealand Banking Group Ltd. in Sydney. ``There's also speculation there will be more diversification by sovereign funds. That looks to be a negative for the dollar.''

The National Association of Home Builders/Wells Fargo index of sentiment declined to 27 this month from 28 last month and core consumer prices, which exclude food and energy costs, rose 0.2 percent in June, according to Bloomberg News surveys. The dollar has fallen 2.9 percent versus the euro over the past month.

European Inflation

The euro may be supported by speculation a report today will show inflation stayed close to the European Central Bank's 2 percent ceiling for a 10th month in June, backing the case for raising interest rates.

Europe's single currency may extend the past month's 1.8 percent advance against the yen on prospects higher borrowing costs in the 13-nation region will boost the allure of euro- denominated assets. The yield spread between two-year German and Japanese bonds was 3.459 percentage points today, above the average of 3.095 percentage points over the past year.

``The ECB is expected to hike rates,'' said Dai Sato, manager of the Singapore treasury department at Mizuho Corporate Bank Ltd. ``We may see some buying of the euro,'' which may rise to $1.3800 and 168.30 yen today, he said.

Consumer prices in the region increased 1.9 percent in June from a year earlier, the same as in May, according to a Bloomberg survey.

ECB Rate Bets

Investors expect the ECB to lift rates at least once more this year from 4 percent, futures trading shows. The implied yield on the December Euribor futures contract has risen 3 basis points from the end of June to 4.585 percent.

The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB key rate since 1999.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net ; David McIntyre in Sydney at dmcintyre2@bloomberg.net

looks like we could be moving here

moving to New Zealand?

FX markets just opened and looks like the YEN is weakening against everything again, down over 100 against sterling and euro on the open

Shouldn't be for another hour or so..... you sure?

yep I'm trading it now opens at 9:00 UK time, its off its highs now us/yen currently up 42 was 65,

hey jubber, post a link mate

I'm using IG index UK spreads betting company, www.igindex.co.uk very thin trading this time of day Singapore I think, but both the OZ and NZ are expected to hike another 25 points this week, obviously if this happens it will support the carry trade, unless there is a large fall in the markets which in turn would see it turn around, or a concentrated assault on the dollar...don't forget its London where the action is in FX, any move in the far east is usually peanuts and can be easily reversed in the UK early hours

Real-time quotes:

http://www.forex-markets.com/quotes.htm

Yep. Got it.

Its now on my US-centric screen too

Looks like the dollar is getting roached again - 205.50 on the GBP!? Wow!

The Euro/Yen currency pair is significantly overvalued. Selling the euro, british pound, and US dollar and buying yen may be the blockbuster trade of the century. When the carry trade unwinds (it will unwind), expect the yen to whipsaw the other direction.

Rarely do any trends continue straight up in a straight line without a severe correction.

I'm going to buy yen calls. When the subprime debacle cracks the credit markets, those should do nicely.

If it does, massive losses in emerging markets will manifest themselves, as well as losses (obviously) in all leveraged asset classes! Oh wait, that is everything nowadays...

seems to be an attempt underway now in London

massive move now against £ 350 points!

Yen .vs. dollar now 118.29 and falling like a STONE.

What are the chances we RAISE rates this week?

Zero.

We're ****ed. The opportunity to do it was at the Fed meeting.