The YEN Carry-trade 2007

Housewives Outmaneuver UBS, Deutsche Bank in Yen Carry Trading
By Kosuke Goto
June 18 (Bloomberg) --

Japanese businessmen, housewives and pensioners betting against the yen in their spare time are wrecking the forecasts of the world's biggest currency traders.
The yen has slumped 4.6 percent to a 4 1/2-year low against the dollar this quarter, making it the worst performer among 72 major currencies and confounding predictions by strategists at Deutsche Bank AG and UBS AG for gains of about 1 percent.
The banks didn't reckon on the risk appetite of Japanese individuals, who are borrowing money like never before to buy currencies with higher yields. They tripled their trading in the year ended March to a record $11 billion a day, according to Tokyo-based Yano Research Institute Ltd., publisher of an annual report on the business. Globally, currency trading by retail investors rose 54 percent in 2006, according to research firm Greenwich Associates in Greenwich, Connecticut.
``Japan's interest rates are too low,'' said Hiroshi Ono, a 40-year-old sales clerk at a telephone company in Tokyo. Ono said he has made about $17,000 since March by borrowing $200,000 of yen and buying U.S. dollars to take advantage of the 4.75 percentage-point difference between Japanese and U.S. interest rates.
Japanese investors are borrowing yen at the central bank's 0.5 percent overnight lending rate and buying higher-yielding currencies in New Zealand, the U.K., Australia and even Brazil to increase returns on 1,536 trillion yen ($12.5 trillion) in savings. The strategy is called the carry trade.

Low Rates
Japan's overnight rate, the lowest among major economies, is 7.5 percentage points less than New Zealand's key rate and 3.5 percentage points below that of the European Central Bank.
``Japan's margin traders have the power to support currencies against the yen,'' said Derek Halpenny, a strategist in London at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's biggest lender. ``We estimate they make up 15 percent of yen trading in Tokyo hours. Maybe even more.''
The yen slumped 1.4 percent last week, its biggest drop in five months, to 123.44 per dollar. It dropped 1.5 percent to 165.26 to the euro. Halpenny predicts the yen will reach 125 per dollar before ending Sept. 30 at 123.
``The yen carry trade is still alive,'' said Koji Fukaya, senior currency strategist in Tokyo at Deutsche Securities, a Deutsche Bank subsidiary. ``Capital outflows from Japan remain steady and more than we expected.''
The Frankfurt-based bank, the biggest currency trader according to Euromoney magazine, forecast at the end of March that the yen would trade at 117 per dollar by June 30, matching the median of 39 analysts, traders and investors in a Bloomberg News survey. Zurich-based UBS, ranked second, predicted 116.
In late December, Deutsche Bank forecast the yen would rise to 113 yen by the end of the first quarter and UBS predicted 111. It fell to 117.83.

Bane of Pros
UBS and Deutsche Bank are sticking to their forecasts for a stronger yen, saying central bank curbs on money supply will starve the carry trade.
``Tighter global liquidity will contribute to increased volatility and enable the yen to strengthen as the carry trade is unwound,'' said Ashley Davies, currency strategist in Singapore at UBS, which expects the yen to gain to 121 per dollar in a month and to 117 in three months.
Retail investors' strategy of selling yen during rallies helped push volatility implied by one-month dollar-yen options on June 5 to 5.85 percent, the lowest since the Bank of Japan began compiling data in August 1992, compared with 10.15 percent on March 5. Lower volatility may encourage carry trades, as it implies smaller exchange-rate fluctuation risk.
``They are the bane of professional currency traders,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., who has been trading in Japan's capital city for 25 years. ``It's becoming hard to make money as the dollar-yen doesn't move as it used to, because of their constant buying on dips.''

Global Trading
Global trading by investors other than banks, fund managers and companies surged 54 percent last year, said Peter D'Amario, a consultant at Greenwich Associates. The category, which includes retail investors, accounted for 16 percent of trades handled by 1,700 firms surveyed, up from 10 percent a year earlier. It grew 80 percent in Europe, 55 percent in Asia Pacific and 30 percent in the Americas.
In Japan, individuals have opened 600,000 so-called margin trading accounts at brokerages that lend money for currency bets, 80 percent more than a year ago, according to Yano Research.
When the yen fell to a two-week low of 162.20 yen against the euro on May 25, Naoko Ogawa, a 34-year-old freelance writer, used a 1,000 euro ($1,300) deposit to buy 10,000 euros. She sold four days later, close to a then-record high of 164.29 yen.
Buying on Dips
``You just need to buy the dollar and the euro on dips, then sell them at a profit,'' said Ogawa, who added that she has made a 20 percent return on her 1 million yen trading account since December. ``It's better than stock trading, as you can rely on daily interest.''
Deposits in margin trading brokerages have risen 60 percent to $4.9 billion in the past year, Yano Research found. While that's about 2 percent of the $272 billion that Japanese individuals have put into mutual funds that invest overseas, borrowing typically makes their positions 10 to 30 times larger.
Japanese traders stepped up their purchases of the New Zealand dollar when the Reserve Bank of New Zealand sold its currency on June 11, weakening the so-called kiwi by as much as 1.8 percent.
Margin traders' net long positions in the New Zealand dollar against the yen doubled to $347 million on that day from $180 million on June 8, according to data from Tokyo Financial Exchange. Long positions are bets that a currency will rise. A carry trade that bought the New Zealand dollar funded with yen would have returned 14 percent so far this year.

Real, Lira
Deutsche Bank officials began weekly visits with 30 Japanese margin trading brokerages after the orders they channel through the firm doubled in a year, said Drew Bradford, head of global finance and foreign exchange in Tokyo, where the lender's currency sales team has tripled to 17 in a year.
``The growth is phenomenal,'' he said. ``They are buying pounds, Australian and New Zealand dollars. The more adventurous are looking at the Brazilian real and Turkish lira.''
In an April report, the Bank of Japan highlighted the risk that investors may make imprudent decisions based on ``favorable'' assumptions about foreign-exchange and interest rates.
Governor Toshihiko Fukui followed that with another warning, saying expectations that rates will stay low could invite ``inefficient'' investment. ``If stock and bond markets or the yen carry trade become unbalanced and unwind, that would have a negative effect on the economy,'' he told lawmakers on June 5.

Hire the Housewife
When the carry trade collapsed in 1998 following Russia's debt default, the yen jumped 20 percent in less than two months. The biggest challenge to the strategy this year came when Chinese stocks slumped on Feb. 27, prompting fund managers to cut riskier investment and pay back yen loans. The yen rose 2.3 percent in a single day, the biggest gain since July 2005.
Japan's recovery has actually helped to weaken the yen by increasing the appetite of local investors for risk, said Masafumi Yamamoto, currency economist at Nikko Citigroup Ltd. in Tokyo and a former Bank of Japan currency trader.
``It is likely Japanese retail investors will continue to increase their foreign currency exposure, especially to that of high-yielding currencies like the New Zealand dollar,'' he said.

The end of cheap money?

An era of cheap money - gone

Rates around the world are heading higher, which could mean the beginning of the end of an era of supercheap capital.
By Grace Wong, CNNMoney.com staff writer
June 14 2007: 2:28 PM EDT

LONDON (CNNMoney.com) --
This month's rise in global interest rates is probably a sign of the beginning of the end of an era of supercheap money - a change with profound implications for the recent record-setting stock rally, the buyout boom and economic growth worldwide.
The question now is how much more rates might rise in the United States and elsewhere, and how that will affect world markets - and hundreds of millions of investors and consumers from Tokyo to Frankfurt to New York.
The yield on the 10-year Treasury note, which affects rates throughout the economy, has spiked to the highest level in five years on growing worries about rising rates worldwide.

For years, the world has enjoyed historically low interest rates. This has helped fuel a boom in corporate mergers and private equity buyouts and a rally in stock prices and in other assets, such as real estate. But with economic growth outside the United States picking up and fanning inflation, central bankers around the world are pushing rates higher in a bid to cool growth and avoid bigger problems later on.

Mortgage rates: biggest spike in 4 years
"There's been too much global liquidity and now we are seeing a shift away from multi-decades of declining rates and declining inflation," said Josh Stiles, managing director of research firm IDEAglobal in New York.
"This is the end of the cheap money cycle," Marc Pado, U.S. market strategist at Cantor Fitzgerald in New York, said.
The European Central Bank, which sets rates for most of Europe, hiked rates to a six-year high last week. The Bank of England and Bank of Canada are both expected to raise rates next month, and the Bank of Japan is expected to hike rates by the fall.
Higher rates raise the cost of borrowing for businesses and consumers and are poised to impact everything from economic growth and corporate profits to the performance of stocks and bonds and the payments that home owners make.

Here's a brief look at what higher rates will mean for global economy, financial markets and investors around the world.

Bonds
There has been no market where concerns about inflation and rising interesting rates have played out more dramatically than in the usually staid bond market.
The yield on the benchmark 10-year Treasury note hit 5.3 percent this week, the highest level in five years. Yields have backed off a bit since then, but are still up from just 4.5 percent three months ago. The drop in bond prices - and rise in yields, which move in the opposite direction - has come as bond traders unwind bets that rates would stay low - or even head lower still.
"People are being more optimistic about the U.S. economy, and therefore have written off rate cuts from the Fed that they were expecting," said Laurent Fransolet, head of European fixed income research at Barclays Capital in London, referring to the Federal Reserve.

Benchmark Treasury yield hits 5-year high
After having been so low for so long, investors are waking up to the reality that yields will rise to more "normal" levels. Long-term Treasury yields have been kept low in recent years, in large part due to strong buying from foreign central banks. But as those overseas investors diversify their holdings, their appetite for U.S. government debt is expected to drop, analysts say. That in itself could feed more bond market selling and more upward pressure on rates.
Bond yields aren't just rising in the United States. The yield on a global basket of government bonds is at 4 percent - the highest level since December 2000, according to the Lehman Brothers Aggregate Global Treasury index, which tracks the performance of government bonds from 33 countries.
Those heavily invested in bonds may be lamenting the heavy selling, but the rise in yields may be something investors have to get used to, said Ken Mayland, president of ClearView Economics, a firm specializing in economic research. "Demand for capital has become much more intense. The improvement in the world economy justifies paying a higher yield - that's not a bad thing," he said.
Higher yields also make bonds a more attractive investment, and if yields keep climbing, as many market watchers expect them to do over the next few years, that could lure some investors away from stocks.

Stocks
Global stock markets have rallied, supported by the buyout boom and a flood of funds from investors large and small alike. But rate concerns pummeled stocks over the past two weeks, until the markets snapped back Wednesday and showed further signs of life Thursday.
Before the recent pull back, the Dow industrials and broader S&P 500 had risen to record highs. Stocks in Europe were rallying too. The pan-European Dow Jones Stoxx 600 is close to its record high.
Why all the turmoil in stock markets? Rising rates dampen economic growth, and that can hurt corporate profits - and stock prices. They also are likely to crimp merger and buyout activity, which has been a key source of support for stocks worldwide.

"Valuations are a function of interest rates," says Christopher Zook, chairman and chief investment officer at CAZ Investments in Houston. "As interest rates move higher, valuations will come down," he said.
Investors are starting to reassess their willingness to take on risk, but rates will have to move much higher before they really start to hurt the stock market, analysts said. The recent selloff took the Dow industrials and the S&P 500 down about 3 percent apiece - a modest decline given the market's recent run. Still, it's not clear the selling is wrung out of the market yet.
Peter Dixon, strategist at Commerzbank in London, expects markets to level off as investors reassess where they see opportunity.
"The warning shots fired by the market will perhaps make investors stop and think about whether they can continue to pile into asset classes without abandon and not have to pay the price at some time," he said.
It will take some time for this to play out in the market, and some markets may be hit harder than others. Dixon thinks European stocks will sell off less than in the United States, mostly because recovering consumer demand should offer support.
Economic growth
Rising rates could hurt economic growth, especially in the United States, where rising mortgage rates could threaten the already fragile housing sector by increasing the burden on home buyers.
The housing sector already faces pressure from an oversupply of homes on the market and falling home values in some markets. The sector also faces risks from ongoing problems in so-called subprime loans to borrowers with weak credit.
Weakness in the housing sector has worried economists, and the market still may worsen. At their last meeting in May, Federal Reserve officials said the downturn in housing was turning out to be more severe than expected.

Rising rates threaten the buyout boom
But even though central banks abroad are raising rates, the Fed won't necessarily follow along. The U.S. economy grew at just a 0.6 percent rate in the first quarter - the weakest in just over four years - though the second quarter looks to be stronger.


Still, Paul Donovan, senior global economist at UBS in London, noted that inflation seems to easing and said he expects the U.S. economy to slow further in the second half. He believes it's actually more likely that the Fed will lower rates eventually, rather than hike them, as many investors now fear.

And when it comes to the global economy, the outlook remains upbeat. The main reason central banks are lifting rates overseas is that global growth has been strong, and isn't slowing as much as economists had expected.

"Globally, growth has in some cases surprised on the upside. You've got a situation where rates are rising because growth isn't slowing relative to where expectations were rather than a situation where rates are pushing down growth," Donovan said.

He expects global growth of 4.9 percent this year, which matches the forecast from the International Monetary Fund.

Things getting weirder...

1) RB selling NZDs to force down the exchange rate... looks like desperation.

2) Meta Dwyer (real estate agent) selling a house in Mt. Pleasant and not allowing potential clients to view it UNTIL they have made an offer!

3) A construction firm sending all it's staff plus partners to Australia as a bonus.