DJ Forex Focus: Interest In Carry Trades Likely To Intensify
(DowJonesNewswires, tm/13.04.2007, godz. 09:17)
LONDON (Dow Jones)--Look for carry trade activity to become even more intense than it is now.
There are already signs that flows into high-yielding currencies from low-yielding ones are stronger now than they were earlier this year.
With the meeting of the Group of Seven leading industrial nations' finance ministers in Washington this weekend unlikely to produce any real obstacles, and with international investment flows out of Japan once again working against the yen, there is a good chance that the advance of typical carry trades such as the euro/yen will accelerate.
Even though this pair hit a record high of 160.88 earlier Friday, analysts remain convinced of further gains.
At BNP Paribas, technical analysts point to another immediate target at 161.35, while at Bank of Tokyo-Mitsubishi, head of global currency research Paul Chertkow is looking for the pair to eventually make it up to 165.00.
Although this renewed interest in carry trades had been expected, given the continued divergence of interest rate yields, many had been looking for the trend to wane.
"Poppycock!," said Armin Mekelburg, a foreign exchange strategist with Unicredit Markets and Investment Banking in Munich.
"The advance in euro/yen has been substantially faster in recent weeks than in January/February," he said, noting that the same holds true for the euro's rise against the other major funding currency, the Swiss franc.
News from the ministry of finance in Tokyo this week that the start of the fiscal year has brought a surge in outward investment won't help the Japanese currency.
Data shows that the total net outflow from Japan surged to Y760.8 billion last week from Y538.6 billion the week before as Japanese investors placed more money in securities abroad than foreign investors were putting in the Japanese stock market.
However, it is this weekend's meeting of G7 finance ministers that could well prove the clincher for carry trade in general.
In the past, currency markets have often turned cautious ahead of these meetings in case ministers decide to issue a formal threat over the direction of currencies.
In recent months, there have certainly been concerns not only about the weakness of the Japanese yen in general, but its decline against the euro in particular, with European politicians frequently expressing their dismay at the trend.
This time around, though, G7 may well prove even more ineffectual than usual.
Given the recent strength of the euro-zone economy, European complaints over the possible damage a strong euro could inflict will find little support elsewhere.
And with the Japanese recovery remaining fragile - as a sharp decline in machinery orders reminded the markets this week - Japanese officials will be keen to prevent any talks about the yen's decline.
Simon Johnson, the International Monetary Fund's chief economist, certainly gave his support by suggesting earlier this week that there is no need for the Japanese authorities to intervene to address the carry trade, despite earlier fears of a sharp correction.
Lena Komileva, G7 economist at International brokers Tullett Prebon in London, suggested that the G7 is having little impact on market sentiment.
"The combined weakness of financing currencies and the broad-based weakness of the yen in particular suggests that the forthcoming G7 meeting is having little impact on market psychology and focus is instead on declining volatilities for foreign exchange, equities and bonds, which has served to attract market flows back into carry trades," she said.
Elsewhere, other developments remain helpful.
Risk aversion levels continue to fall, with most indexes headed firmly into risk-loving territory that will make investors even more comfortable pursuing carry trades.
Meanwhile, the benefits of the move are only likely to grow. Although the European Central Bank didn't hike rates Thursday, there remains a high probability that rates will rise again in June - making the euro's yield that much more attractive relative to that of its Japanese counterpart.
Early Friday, as the market waited for the G7 meeting, the dollar found itself under pressure again, falling to Y118.75 by 0715 from Y119.05 late Thursday in New York. The euro was up at $1.3524 from $1.3489 and at Y160.60 from Y160.59. |
