Monday, January 22, 2007


80's Currency Bubble "Deja Vu" In Japan

Bloomberg reports on the Japanese yen. "There has been another delay in the great yen rally that investors have been waiting for, and Bank of Japan policies are to blame. By leaving its benchmark interest rate at 0.25 percent last week, the Japanese central bank appeased politicians arguing the economy is too fragile to withstand higher borrowing costs. It also mollified investors who have borrowed cheaply in yen and parked those funds in higher yielding assets overseas."

"The upshot is that the Bank of Japan may have provoked a new wave of the yen carry trades that will add to distortions in the Japanese economy, as well as the global one."

"In a recent report to clients, analysts at Bridgewater Associates, a money management firm in Connecticut, said they were 'getting queasy about the amount of money that's going into carry trades, driving down spreads and making these positions more risky. Low yields and credit spreads have also created much lower expected returns and much higher price risk, further increasing the markets' riskiness,' Bridgewater argued."

"'This is deja vu from the late 1980s. The carry trade is creating a currency bubble this time,' says Masaaki Kanno, chief economist at JPMorgan Securities Japan."

The Financial Times. "The yen hit a nine-year low against sterling and a near four-year trough against the dollar on Monday amid continued investor appetite for carry trades. Indeed, figures showed that speculative short yen positions on the Chicago Mercantile Exchange hit record levels in the week to January 16."

"However, Adam Cole, strategist at RBC Capital Markets, said he believed that market positioning against the yen was still not overstretched. 'Carry trades should continue to perform,' he said. 'So dollar/yen should grind higher.'"

"By mid-afternoon in New York, the yen had fallen 0.3 per cent to Y121.60 against the dollar and 0.5 per cent to Y240.40 against the pound. The low-yielding Swiss franc, itself widely used as a carry trade funding vehicle, also lost ground, easing 0.1 per cent to SFr1.2490 against the dollar and 0.1 per cent to SFr1.6190 against the euro."

"Hidenao Nakagawa, secretary-general of Japan's ruling Liberal Democratic Party, called for the establishment of a framework that would allow the BoJ to align its policy goals with those of the Japanese government ahead of policy decisions. 'What he envisages is not exactly clear, although it will not help to soften fears of political interference in the monetary policy process and this is not good for the world's second largest economy,' said Ian Gunner, currencies strategist at Mellon Financial."

From MarketWatch. "Gold futures fell from a high of more than $640 an ounce Monday to close lower for the session, reflecting oil's price retreat and finding further pressure from gains in the U.S. dollar. 'The movements of the energy market will remain influential to gold in the coming sessions,' said James Moore, an analyst at London-based 'The metal may garner some support as oil prices to appear to be forming a base above $50.'"

"For now, 'gold looks positive on the charts' but needs to clear what Moore called a 'congestion area' that he pegged at $642 to $648 an ounce. If it breaks through, this would 'enable gold to reach $676,' he told clients."

"Other metals climbed along with gold to start the week, with the exception of platinum, which saw its April contract fall by $3.40 to end at $1,165.10 an ounce. The March contract for sister metal palladium closed up $1.80 at $346.70 an ounce.
March silver futures closed 8 cents at $13 an ounce, after touching $13.21, a nearly three-week high."

"OPEC nations are unloading Treasuries at the fastest pace in more than three years as crude oil prices tumble, sending bond yields higher."

"Exporters including Indonesia, Saudi Arabia and Venezuela, sold 9.4 percent, or $10.1 billion, of their U.S. government debt securities in the three months ended in November, according to Treasury Department data. Members of the Organization of Petroleum Exporting Countries last sold Treasuries for three straight months in June 2003."

"Oil producers have surpassed Asian central banks as the largest pool of global savings, accumulating an estimated $500 billion in 2006 alone, according to research by Pacific Investment Management Co. The sales during those three months mark a reversal because OPEC countries have boosted their holdings of U.S. government bonds by 70 percent to $97 billion in the past 17 months, Treasury data show."

"'There will be a significant sell-off,' Joseph Stiglitz, a Nobel laureate and economics professor at Columbia University in New York, said in an interview. 'Medium-term and long-term yields will go up.'"

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