Yen Rises, Heads for Best Week in Nine Years Versus N.Z. Dollar

From Bloomberg this morning:

Yen Rises, Heads for Best Week in Nine Years Versus N.Z. Dollar

The yen rose, heading for the biggest weekly gain versus the New Zealand dollar in almost nine years as stock-market losses prompted investors to exit holdings of higher-yielding assets funded by loans in Japan.

Japan's currency also traded through 116 against the U.S. dollar for the first time in five months and climbed to the highest in more than four months against the euro as investors exited so-called carry trades because of a global rout in equities. Asian shares had the largest drop in a year, with South Korea's Kospi index set for the biggest loss since June 2002.

``There's still scope for dollar-yen and other cross-yen currencies to drop,'' said Masafumi Yamamoto, an economist at Nikko Citigroup Ltd. in Tokyo and a former Bank of Japan trader. ``Stocks are falling and volatility is rising. It's a difficult environment for risky transactions such as carry trades.''

The yen rose to 80.06 against New Zealand's dollar at 7:46 a.m. in London from 82.78 in New York yesterday, a 10 percent rally this week, the most since October 1998. It gained to 93.24 versus Australia's dollar from 95.62. The Southern Hemisphere currencies had been carry-trade favorites, with interest rates as much as 7.75 percentage points higher than in Japan.

The yen advanced to 115.93 per dollar from 116.61 and reached 115.71, the strongest since March 8. It climbed as high as 155.01 per euro, the strongest since March 19, before trading at 155.60, from 156.76 yesterday. It may advance to 115 against the dollar and 154 per euro in one week, Yamamoto said.

`Biting Our Nails'

``We're biting our nails here,'' said Tobias Davis, senior currency dealer at Custom House Global Foreign Exchange in Sydney. ``There's a massive unwinding of carry trades. Foreign- exchange and stock markets are being driven by fear. Everyone was prepared for a correction, but not to this extent.''

The Morgan Stanley Capital International Asia-Pacific Index of regional shares lost 2.8 percent, falling to the lowest since March. U.S. stocks dropped yesterday, with the Standard & Poor's 500 Index losing all of its gains for the year on speculation the biggest U.S. mortgage lender will be forced into bankruptcy.

``We're seeing the yen benefiting from an unwind in the carry trade,'' said Jonathan Cavanagh, a currency strategist at Westpac Banking Corp. in Sydney. ``In these skittish markets, risk aversion is dominating.''

Two-year Treasuries rallied as investors turned to the safety of government debt, helping the dollar gain against the euro, according to Yuji Saito, head of the foreign-exchange sales department at Societe Generale SA in Tokyo. The dollar may rise to $1.3380 per euro today, he said.

'Selling Panic'

The yield on the benchmark two-year note dropped to the lowest since October 2005 at 4.25 percent, according to bond broker Cantor Fitzgerald LP.

``Money managers are being pressured to sell and they're going into cash and U.S. Treasuries,'' said Mark Mobius, who oversees $30 billion at Templeton Asset Management Ltd. in Singapore. ``It's a selling panic.''

The dollar traded at $1.3422 from $1.3442 yesterday, when it rose 0.7 percent. It touched $1.3385, the strongest since June 22 and has rebounded from a record low of $1.3852 on July 24.

Yen gains may be limited as charts that some traders use to predict price movements signal the currency's 2 percent rally against the dollar in the past week was too fast.

The dollar's 14-day stochastic oscillator versus the yen was 6.4 today. The charts measure the price of a security relative to its highs and lows during a particular period to try to predict a rise or fall. A level below 20 suggests the currency has been sold excessively.

``The yen is overbought on the charts,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank in Tokyo. ``Some of these buyers may switch to selling the currency,'' which may fall to 116.75 per dollar and 156.80 a euro today.

Volatility on one-month yen options reached 13.9 percent today, the most since September 2003. Volatility on one-month euro-yen options reached 15 percent, the highest in six years.

Knock the Dollar

U.S. reports today may show housing starts last month slowed to an annualized pace of 1.4 million, from 1.467 million a month earlier, while the Philadelphia Federal Reserve's survey on manufacturing in the region may drop to 8.6 this month from 9.2 in July, according to Bloomberg News surveys.

``The housing data could knock the dollar lower against the yen,'' said Tokichi Ito, deputy general manager of foreign exchange at Trust & Custody Services Bank Ltd. in Tokyo. ``We're looking for a slowdown in housing, reinforcing that the subprime problem is driving this market.''