Yen advances on unwinding carry trades

Yen Advances on Speculation Investors Are Reducing Carry Trades
By Stanley White and Ron Harui

Aug. 14 (Bloomberg) -- The yen rose for a second day against the euro and the dollar on speculation investors are reducing riskier assets funded by loans in Japan amid concern losses related to U.S. subprime mortgage defaults are spreading.

Asian equities followed U.S. stocks lower after Sydney-based RAMS Home Loans Group Ltd. said a shakeout in global debt markets may cut its earnings. The yen has advanced against all of the 16 most-active currencies tracked by Bloomberg since July 20, when the subprime crisis sparked a global financial market rout, prompting the unwind of so-called carry trades.

``Traders may try to buy the yen against the euro today,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``There's a lingering sense that subprime problems will be with us for a while, so some people will want to play it safe and reduce yen carry trades.''

The yen climbed to 160.39 against the euro at 10:48 a.m. in Tokyo from 160.97 late yesterday in New York and near a four- month high of 159.98 reached on Aug. 10. Against the dollar, the yen rose to 117.84 from 118.25. Japan's currency gained 0.7 percent versus the euro yesterday and has rebounded from a record low of 168.99 on July 23. It may reach 160.05 today, Soma said.

Currency movements may be exaggerated by O-bon holidays this week, when Japanese often take week-long vacations to honor ancestors, Soma said. Trading volumes today may be less than half the usual amount, he said.

The Morgan Stanley Capital International Asia-Pacific Index of shares fell 0.2 percent, following yesterday's 0.1 percent decline in the Standard & Poor's 500 Index. U.S. subprime lender Aegis Mortgage Corp. filed for bankruptcy and Canadian financial- services company Coventree Inc. said it failed to sell asset- backed commercial paper yesterday.

N.Z. Retail Sales
The New Zealand dollar fell 1.2 percent to 86.41 yen after retail sales unexpectedly dropped 0.4 percent in June as record- high borrowing costs curbed domestic demand. The Australian dollar declined 0.7 percent to 98.87 yen and the pound fell 0.4 percent to 237.03 yen.

These currencies have benefited from yen carry trades because of interest rates as much as 7.75 percentage points higher than those in Japan.

``In the short term we have these credit issues and the U.S. stock-market performance was very ordinary,'' said Peter Pontikis, treasury strategist at Suncorp-Metway Ltd. in Brisbane, Australia. ``What we are having is the unwinding of the carry trade.''

Volatility on one-month dollar-yen options was at 10.80 percent, near the 15-month high of 11.15 percent yesterday. Volatility on one-month euro-yen options was at 11.80 percent, close to yesterday's high of 11.85 percent, the strongest since April 2004. Higher volatility may discourage carry trades as it implies the bets will be exposed to greater exchange-rate fluctuations.

Money Markets
The Bank of Japan drained 600 billion yen ($5.1 billion) from the financial system after adding money for the past two days to anchor interest rates. The bank had provided 1.6 trillion yen since Aug. 10 to rein in rates toward its target of 0.5 percent, joining U.S. and European central banks to help avert a crisis of confidence in global credit markets.

The Reserve Bank of Australia added A$2.61 billion ($2.2 billion) to its financial system today. The central bank has injected A$9.10 billion via so-called repurchase agreements to the banking system since Aug. 10.

``The BOJ may have to add funds to the financial system in the future, because no one is sure how long the subprime loan problem will affect the credit market,'' said Akio Shimizu, chief manager of foreign exchange trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``The RBA also shows this problem isn't completely finished. This kind of uncertainty helps the yen, because it will lead people to avoid risk and unwind carry trades.''

The yen may rise to 117.50 against the dollar and 160 per euro today, he said.

Treasury Payments
The dollar fell against the yen on speculation Japanese investors will bring home cash from the U.S. amid concerns credit-market losses will deepen.

The U.S. currency weakened for a second day as the Treasury is due to make coupon payments on $22.6 billion of government debt tomorrow, the most since August 1999, according to Wrightson ICAP. The dollar has dropped 2.5 percent versus the yen since July 20, when a collapse of the subprime-mortgage market caused a plunge in global shares.

``Investors are risk averse as they're worried about the credit issue, so they're likely to repatriate those payments,'' said Yuji Saito, head of the foreign-exchange sales department at Societe Generale SA in Tokyo. ``It's negative for the dollar and positive for the yen.''
The dollar may decline to 117.60 yen and $1.3720 per euro today, Saito said.