April 19, 2011 / 3:03 AM / 8 years ago

FOREX-Yen climbs as carry trades unwound on sov debt jitters

* Yen edges up on carry trade unwind, Asian stocks hit

* Traders see broad profit-taking in risky assets

* Some macro hedge funds look to by dollar/yen near 82

* Japan finmin repeats support for Treasuries

By Ian Chua and Eric Burroughs

TOKYO/SYDNEY, April 19 (Reuters) - The yen edged higher in Asia on Tuesday as a slide in Asian stock markets prompted more market players to cut back on carry trades, even as hedge funds were spotted adding to bets that the Japanese currency would soon resume its drop.

Risky assets were hit by a double-whammy on Monday after fears mounted that Greece will have to restructure its mountain of debt, possibly as early as this summer, and Standard & Poor’s threatened to cut the United States’ prized AAA credit rating.

The drop in Wall Street shares spilled across Asia, with Japan’s Nikkei average and Hong Kong’s Hang Seng both shedding 1.5 percent as foreign investors trimmed back holdings put on in the past few weeks.

Traders and analysts said the S&P threat would likely have little lasting impact, and even the euro’s slide on worries about Greece seemed more driven by profit-taking after the euro’s rise ran out of steam above $1.45 last week.

But the build-up of positions in risky assets — IMM futures speculators held near-record long positions in the Australian dollar last week, while euro longs hit a three-year peak — suggested that a squeeze could last for a bit longer.

“It’s kind of a healthy correction. The market had bought too much in a kind of euro euphoria,” said Masafumi Yamamoto, chief FX strategist at Barclays Capital in Tokyo.

“Events regarding the peripheral countries are used as an excuse to take profits. It’s not a restart of the euro crisis,” Yamamoto said.

Yamamoto also said the lack of a clear reaction in the dollar and Treasuries to the S&P action suggested that it was not the most important factor for the market.

S&P slapped a negative outlook on the U.S. top-notch rating and said there was at least a one-in-three chance that it could eventually be cut unless the Obama administration and Congress find a way to slash the yawning federal budget deficit within two years.

“Discussions on the U.S. losing its AAA-status have been active for two years, if not longer. S&P’s move might have been a jolt, but should not really be a true surprise,” said David Watt, senior currency strategist at RBC Dominion Securities.

In a classic flight to safety, the dollar jumped and Treasury yields fell despite the threat of an S&P ratings cut — suggesting investors were not fretting too much about the action while looking to see if Washington makes progress on reducing deficits.

Japan’s finance minister said that he still thinks Treasuries are an attractive investment for the world’s second biggest holder of FX reserves, totaling $1.12 trillion.

The twin drivers saw Wall Street post its biggest fall in a month and provided investors a timely excuse to take profits on long positions in higher-yielding currencies and equities before the Easter holidays.

That helped the yen, which had recently been dumped in favour of higher-yielding currencies, rise broadly.

The euro was steady on the day at 117.30 yen after falling as low as 116.49 yen on EBS, the lowest since March 30.

The single currency was also little changed at $1.4220 after having skidded to a low of $1.4156 on Monday, breaking the upward trendline of its January-April surge and leaving it exposed to a deeper pull-back.

The dollar dipped to 82.53 yen after having fallen to a near three-week low of 82.19. Traders said macro hedge funds were looking to go long the dollar around these levels, both buying spot and picking up dollar/yen call options.

Traders also cited talk of Japanese life insurers buying dollars to purchase Treasuries and other debt when the dollar falls near 82. Japanese life insurers have been repeatedly cited as dollar buyers since the greenback plunged to a record low last month.

The 82.00 level marks a critical zone of chart support — the intraday peak reached during the March 18 bout of coordinated G7 intervention, while 81.99 is the 38.2 percent retracement of dollar/yen’s March-April surge.

Against the dollar, the euro was at $1.4207 after sliding to a two-week low at $1.4156 on EBS.

This helped the dollar index , which tracks its performance against a basket of major currencies, rise to two-week highs of 75.810, well off a 16-month low of 74.716 set last week.

Still, analysts said the longer-term bearish views on the U.S. dollar and yen remained intact with both the Federal Reserve and Bank of Japan set to keep monetary policy ultra-loose, maintaining their funding-currency status.

In fact, the early threat of a downgrade may help U.S. policy leaders to make progress on agreeing to substantial budget cuts, said Michael Sneyd, an analyst at Societe Generale.

“All-in-all, we expect a rebound in risk once the heavy de-leveraging has run its course, but this may take until after the Easter break and EURJPY should then be the best performer.”

The Australian dollar was down 0.3 percent at $1.0464 after having shed about a cent on Monday to a low of $1.0454. But the Aussie was not far off a 29-year high of $1.0585 set earlier this month, outperforming other currencies.

The New Zealand dollar also took a hit from the drop in higher-yielding currencies after reaching a three-year peak the previous day. (Editing by Joseph Radford)

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