Carry Trade Restrain from Bear Stearns Woes

Source: Bloomberg
By: Agnes Lovasz and David McIntyre

July 18 (Bloomberg) -- The yen rose as losses on Bear Stearns Cos. hedge funds prompted investors to reduce purchases of financial assets funded by borrowing in Japan.

The Japanese yen advanced against 15 of the 16 most-actively traded currencies as investors scaled back so-called carry trades. The dollar touched a record low against the euro earlier after Bear Stearns told investors in two of its hedge funds they will get little if any money back after losses related to U.S. subprime mortgages.

``Risk appetite is starting to pull back and the potential is that it starts to hurt the carry trade,'' said Ian Stannard, a currency strategist at BNP Paribas SA in London. ``That's positive for the yen.''

Against the dollar, the yen climbed to 122.13 as of 7:19 a.m. New York, from 122.34 late yesterday. It also gained versus the euro, to 168.35 from 168.59. The dollar declined to an all- time low of $1.3833 per euro from $1.3781 in New York yesterday, and last traded at $1.3785.

The yen recovered from a 21-year low versus the New Zealand dollar to trade at 96.58 from 96.63. It rebounded from a 15-year trough against the pound to 250.28 from 250.40 late yesterday.

Investors have favored New Zealand and the U.K. for carry trades because the two countries have interest rates as much as 7.5 percentage points higher than Japan's 0.5 percent rate, the lowest among industrialized countries.

Dollar Declines

The dollar fell to a 26-year low of $2.0548 per pound and weakened to 87.85 cents against the Australian dollar, the lowest since February 1989.

Defaults on loans by homeowners with poor credit histories have deepened a housing market slump that threatens to curb U.S. economic growth. Data later today will show U.S. builders broke ground at an annual pace of 1.45 million new homes last month, down from a 1.474 million rate in May, a Bloomberg survey showed.

Financial industry losses caused by subprime mortgage defaults and the housing slowdown may be addressed by Federal Reserve Chairman Ben S. Bernanke at his two-day semi-annual testimony to Congress starting at 10 a.m. in Washington

A Fed trade-weighted index measuring the dollar's foreign- exchange value fell this week to the lowest since its inception in 1971. The U.S. Trade Weighted Major Currency Index, measuring the currency's performance versus seven currencies, fell to a record low of 77.24 on July 16 and was at 77.29 yesterday.

``Breaking through those levels marks a new stage of the weak dollar trend,'' said Koji Fukaya, senior currency strategist in Tokyo at Deutsche Securities. ``The dollar's depreciation may accelerate.''

Euro May Stall

The euro's gains against the dollar may stall, according to charts traders use to predict future price movements.

The 14-day relative strength index against the dollar was 75.19 today. The index has been above 70, a level which signals the currency is overbought and may be due for a reversal, for a seventh session.

The common European currency faces resistance at $1.3816 and $1.3886, where sell orders are clustered, said Sundararajan Srinivasa, a technical analyst at Lehman Brothers Holdings Inc. in London, in a note to clients.

Any yen gains may be limited by speculation the Bank of Japan will delay raising interest rates while it gauges the impact of subprime loan defaults. The U.S. is Japan's largest export market.

Some BOJ board members said it's necessary to watch the U.S. housing market, according to minutes of the June meeting released today. While some officials said consumer prices excluding fresh food will rise in the long term, others said lower oil prices will exercise ``stronger downward pressure'' on core prices, the minutes showed.

The central bank's board voted unanimously to keep rates unchanged at that meeting. The BOJ decided 8-1 to keep policy on hold on July 12.

``The market has priced in a rate increase in August, but the BOJ may not move until September,'' said Kengo Suzuki, a currency strategist at Shinko Securities Co. in Tokyo.

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

I'm still waiting on the sideline. Only 1 set of buy hedge opened that is near breakeven. EUR/CHF is at overbought zone on 1h chart, back to the previous lower channel support turned resistance. 4h chart indicators pointing up, might still have some room for the upside before making a correction down. Long term or the daily chart is still bear bias.

If you look closer to EUR/CHF 4h chart, you might see a semi-declining channel forming, and price is at the top channel.