Yen correction may be temporary as carry trades prevail

Hot money bounded for emerging market equities and other assets.

Weakening yen and dollar contributes to growth of M3 in emerging markets. A temporary boon for equities?


Yen Rises Most in 10 Weeks as Investors Reduce Carry Trades
By David McIntyre and Kosuke Goto

June 27 (Bloomberg) -- The yen rose the most in 10 weeks against the dollar as investors pared holdings of emerging market bonds and stocks funded by loans in the currency.

Japan's yen gained against the Indonesian rupiah and Malaysian ringgit after Finance Minister Koji Omi yesterday stressed the risk of one-way foreign-exchange bets. It also climbed against the New Zealand dollar after that nation's central bank Deputy Governor Grant Spencer echoed Omi's comments and said traders should expect further market intervention.

``Concern about declines in Asian equities are a good chance to unwind bets for yen weakness,'' said Nobuo Ibaraki, deputy general manager of foreign exchange at Nomura Trust & Banking Co. Ltd., a unit of Japan's largest brokerage. ``Traders are wary of selling the yen following comments from Japanese officials.''

The yen rose to 164.92 per euro at 6:56 a.m. in London from 165.83 late in New York yesterday. Japan's currency climbed to 122.70 per dollar from 123.26, its biggest one-day gain since April 17. It may rise to 165 per euro and 122.70 against the dollar today, Ibaraki said.
Japan's currency increased the most in three weeks against New Zealand's dollar to 93.84 yen from 94.41 yen yesterday.

Not One-Way Bet
``The exchange rate is not a one-way bet,'' Deputy Governor Grant Spencer said in an article prepared for publication and e- mailed to Bloomberg News today. ``Foreign exchange intervention is an ongoing process.''

The yen appreciated 1 percent against Australia's dollar, its biggest gain since April 19, to trade at 103.47 after reaching as high as 103.38, the strongest since June 15.

Investors' confidence to put on so-called carry trades, in which they borrow at Japan's low interest rates to buy higher- yielding assets elsewhere, may ebb as the Morgan Stanley Capital International Asia-Pacific index of leading regional shares fell by the most in almost three weeks. The Standard & Poor's 500 Index is set for the biggest monthly loss in more than a year.

Gains in the yen may be limited by speculation fund managers will convert it into foreign currencies as they prepare to launch investment trusts composed of overseas assets.

Finance companies will market more than 1 trillion yen ($8.1 billion) of foreign-currency investment trusts before the end of June, according to data compiled by Bloomberg. Japan's benchmark rate is the lowest in the industrialized world, reducing the appeal of domestic assets.

``We're going to see carry trades for a long time,'' Gabriel de Kock, chief currency economist in New York at Citigroup Global Markets, said at a conference on foreign exchange in Singapore. ``The yen will be a dog.''

The yen will drop to 125 per dollar by year-end as Japan's 0.5 percent rate encourages investor outflows, said Daisaku Ueno at Nomura Securities Co.

Narrow Range
The narrowest monthly trading range in more than six years in April will prompt Japanese investors to seek higher-yielding foreign assets, pushing down the yen, Ueno said.

The yen that month traded within the smallest band since Oct. 2000, according to data tracked by Bloomberg. The spread between the high of 117.41 yen on April 2 and the low of 119.87 yen on April 16 was 2.46 yen. The range in May was 2.90 yen. The currency this month has had the range of 3.36 yen. The monthly trading range has averaged 4.8 yen since Jan, 2000.

`Likely to Prevail'
``Dollar-yen doesn't move as it used to,'' said Ueno, who in March was named best foreign-exchange analyst in the 19th annual Nikkei analyst rankings. ``In such a situation, the yen carry trade is likely to prevail. The yen's weak trend won't change.''

The dollar also declined against the yen on a report that's likely to show U.S. durable goods orders fell 1 percent last month, the most since January, after rising a revised 0.8 percent in April, according to the median forecast of 73 economists surveyed by Bloomberg.
``There's a real risk that we continue to see U.S. data disappoint,'' said Jonathan Cavanagh, a currency strategist at Westpac Banking Corp. in Sydney. ``The dollar has further to go on the downside.''

The euro's rally from a June 13 low may stall, according to technical charts traders use to predict currency movements, said Yuji Saito, head of the foreign-exchange sales department at Societe Generale SA in Tokyo.

The failure of the euro to sustain a break above so-called resistance at $1.3470 for the three previous days suggests further gains may be limited, Saito said. Resistance is a level where sell orders may be clustered.

``The euro looks bearish on the charts,'' he said. ``The euro may pull back to $1.3400 today,'' from $1.3439.

The $1.3470 level represents a 50 percent retracement of the euro's fall to the June 13 low from the April 27 high of $1.3681, based on a series of numbers known as the Fibonacci sequence.