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Wednesday 8 October 2008
Yen Surges Beyond 100 to Dollar as Traders Reduce Carry Trades
The yen surged beyond 100 per dollar for the first time in six months after a plunge in Asian stocks prompted investors to reduce holdings of higher-yielding assets funded in Japan. PDF
Yen Surges Beyond 100 to Dollar as Traders Reduce Carry Trades
By Stanley White and Ron Harui 8 October 2008
The yen surged beyond 100 per dollar for the first time in six months after a plunge in Asian stocks prompted investors to reduce holdings of higher-yielding assets funded in Japan.
The currency also advanced to near its strongest in three years versus the euro after the International Monetary Fund said the world economy is headed for a recession next year. The British pound gained as Prime Minister Gordon Brown prepares a rescue package that will include injecting capital into struggling banks.
“Lingering fears about the health of financial sectors in the U.S. and Europe and concerns over a global recession should continue to underpin the yen,” said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington. “We’re far from out of the woods and any restoration of investor confidence will take time.”
Japan’s currency rose to 99.96 per dollar at 6:30 a.m. in London from 101.47 late yesterday in New York. It reached 99.87, the highest since April 1. The yen climbed to 135.86 against the euro from 137.89. It reached 135.05 on Oct. 6, the strongest since September 2005. The dollar was at $1.3585 per euro from $1.3588.
Against the Australian dollar, the yen rose to 68.60 from 72.84 late yesterday in Asia. It also advanced to 61.55 per New Zealand dollar from 64.11.
Stocks Slide
South Korea’s won slid to 1,398.00 against the greenback, the lowest in a decade, as a seizure in global credit markets forced companies to turn to currency exchanges to meet their dollar needs. All of Asia’s 10 most-used currencies outside of Japan declined today.
The region’s shares also tumbled, extending a global sell-off that’s erased more than $5 trillion of market value in the past week. The world economy is headed for a recession next year, with U.S. growth forecast at 0.1 percent, according to International Monetary Fund reports published this week.
The stocks rout helped deter carry trades, in which investors get funds in nations such as Japan that have low borrowing costs and buy assets where returns are higher. Benchmark rates are 0.5 percent in Japan, 4.25 percent in Europe, 5 percent in the U.K., 6 percent in Australia and 7.5 percent in New Zealand. The risk of a carry trade is that currency moves wipe out profits.
Gains in the yen accelerated as implied volatility on one-month dollar-yen options rose to 24.12 percent, the highest since January 1999, from 21.79 percent yesterday. Higher volatility may discourage carry trades as it indicates a larger risk of price fluctuations.
U.S. Rates
The dollar may weaken further against Japan’s currency as the Federal Reserve signals it’s prepared to lower interest rates as a credit crisis grips the global economy.
Philadelphia Fed President Charles Plosser speaks on monetary policy at 7:45 a.m. in New York today. The Fed “will need to consider whether the current stance of policy remains appropriate,” Chairman Ben S. Bernanke said yesterday after the U.S. central bank decided to buy commercial paper and help revive the corporate debt market.
“The dollar is likely to edge lower,” said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co., Japan’s fifth-largest broker by revenue. “A possible Fed rate cut highlights how dire the situation is in the U.S. The fundamentals simply aren’t sound.”
Futures on the Chicago Board of Trade showed yesterday a 68 percent chance the Fed will lower its 2 percent target lending rate by a half-percentage point at its Oct. 29 policy meeting, up from 42 percent a day earlier. Remaining odds are for an even larger cut.
U.K. Bank Plan
The pound rose to $1.7495 from $1.7455 yesterday. It also advanced to 77.67 pence per euro from 77.87.
Prime Minister Brown is compiling a bank rescue package after European Union leaders failed to agree a unified response to the credit crisis following talks over the weekend, three people familiar with the decision said. The U.K. government nationalized Northern Rock Plc and Bradford & Bingley Plc to save them from collapse this year.
The Bank of England will reduce its 5 percent benchmark rate by a quarter-percentage point tomorrow, according to the median forecast of economists surveyed by Bloomberg News. Finance ministers and central bankers from the Group of Seven nations will meet in Washington the next day to discuss the deepening financial crisis.
G-7 Meeting
The ministers will discuss stabilizing global stock markets, said a Japanese official who briefed reporters on condition of anonymity. Joint action on currencies and interest rates should depend on economic conditions in member countries, the official said. The G-7 includes Canada, France, Germany, Italy, Japan, the U.K. and the U.S.
UBS AG recommends investors buy the dollar at 102.40 yen, with a target of 107, as governments work to restore confidence in the global financial system.
“The market has reasons to respond positively to efforts from officials in Europe and the U.S.,” wrote analysts led by Benedikt Germanier, a Stamford, Connecticut-based currency strategist at UBS, in a research note yesterday. “Efforts may soon reach a critical level in our view, helping investors’ sentiment.”
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Yen Surges Beyond 100 to Dollar as Traders Reduce Carry Trades
By Stanley White and Ron Harui
8 October 2008
The yen surged beyond 100 per dollar for the first time in six months after a plunge in Asian stocks prompted investors to reduce holdings of higher-yielding assets funded in Japan.
The currency also advanced to near its strongest in three years versus the euro after the International Monetary Fund said the world economy is headed for a recession next year. The British pound gained as Prime Minister Gordon Brown prepares a rescue package that will include injecting capital into struggling banks.
“Lingering fears about the health of financial sectors in the U.S. and Europe and concerns over a global recession should continue to underpin the yen,” said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington. “We’re far from out of the woods and any restoration of investor confidence will take time.”
Japan’s currency rose to 99.96 per dollar at 6:30 a.m. in London from 101.47 late yesterday in New York. It reached 99.87, the highest since April 1. The yen climbed to 135.86 against the euro from 137.89. It reached 135.05 on Oct. 6, the strongest since September 2005. The dollar was at $1.3585 per euro from $1.3588.
Against the Australian dollar, the yen rose to 68.60 from 72.84 late yesterday in Asia. It also advanced to 61.55 per New Zealand dollar from 64.11.
Stocks Slide
South Korea’s won slid to 1,398.00 against the greenback, the lowest in a decade, as a seizure in global credit markets forced companies to turn to currency exchanges to meet their dollar needs. All of Asia’s 10 most-used currencies outside of Japan declined today.
The region’s shares also tumbled, extending a global sell-off that’s erased more than $5 trillion of market value in the past week. The world economy is headed for a recession next year, with U.S. growth forecast at 0.1 percent, according to International Monetary Fund reports published this week.
The stocks rout helped deter carry trades, in which investors get funds in nations such as Japan that have low borrowing costs and buy assets where returns are higher. Benchmark rates are 0.5 percent in Japan, 4.25 percent in Europe, 5 percent in the U.K., 6 percent in Australia and 7.5 percent in New Zealand. The risk of a carry trade is that currency moves wipe out profits.
Gains in the yen accelerated as implied volatility on one-month dollar-yen options rose to 24.12 percent, the highest since January 1999, from 21.79 percent yesterday. Higher volatility may discourage carry trades as it indicates a larger risk of price fluctuations.
U.S. Rates
The dollar may weaken further against Japan’s currency as the Federal Reserve signals it’s prepared to lower interest rates as a credit crisis grips the global economy.
Philadelphia Fed President Charles Plosser speaks on monetary policy at 7:45 a.m. in New York today. The Fed “will need to consider whether the current stance of policy remains appropriate,” Chairman Ben S. Bernanke said yesterday after the U.S. central bank decided to buy commercial paper and help revive the corporate debt market.
“The dollar is likely to edge lower,” said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co., Japan’s fifth-largest broker by revenue. “A possible Fed rate cut highlights how dire the situation is in the U.S. The fundamentals simply aren’t sound.”
Futures on the Chicago Board of Trade showed yesterday a 68 percent chance the Fed will lower its 2 percent target lending rate by a half-percentage point at its Oct. 29 policy meeting, up from 42 percent a day earlier. Remaining odds are for an even larger cut.
U.K. Bank Plan
The pound rose to $1.7495 from $1.7455 yesterday. It also advanced to 77.67 pence per euro from 77.87.
Prime Minister Brown is compiling a bank rescue package after European Union leaders failed to agree a unified response to the credit crisis following talks over the weekend, three people familiar with the decision said. The U.K. government nationalized Northern Rock Plc and Bradford & Bingley Plc to save them from collapse this year.
The Bank of England will reduce its 5 percent benchmark rate by a quarter-percentage point tomorrow, according to the median forecast of economists surveyed by Bloomberg News. Finance ministers and central bankers from the Group of Seven nations will meet in Washington the next day to discuss the deepening financial crisis.
G-7 Meeting
The ministers will discuss stabilizing global stock markets, said a Japanese official who briefed reporters on condition of anonymity. Joint action on currencies and interest rates should depend on economic conditions in member countries, the official said. The G-7 includes Canada, France, Germany, Italy, Japan, the U.K. and the U.S.
UBS AG recommends investors buy the dollar at 102.40 yen, with a target of 107, as governments work to restore confidence in the global financial system.
“The market has reasons to respond positively to efforts from officials in Europe and the U.S.,” wrote analysts led by Benedikt Germanier, a Stamford, Connecticut-based currency strategist at UBS, in a research note yesterday. “Efforts may soon reach a critical level in our view, helping investors’ sentiment.”
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