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Yen continues to edge lower as carry trades resume
LONDON (AFX) - The yen continued to edge lower across the board as a rebound in equities sparked renewed interest in the carry trade -- when money is borrowed in low-yielding currencies, in order to invest in higher-yielding assets elsewhere. The low-yielding yen and the Swiss franc have been the major casualties today, while currencies from regions with high interest rates have benefited, such as the Australian and New Zealand dollars and the pound. 'Rising US stocks continue to fuel fresh demand for carry trades,' said Rhonda Staskow at Thomson IFR Markets. Recently, sharp falls on equity markets amid worries about trouble among US sub-prime mortgage lenders had sparked some unwinding of carry trades. Investors have begun the week by resuming them following firm US inflation data last week and solid gains in equity markets. Trade today has seen the yen fall to near three-week lows against the Australian dollar, the New Zealand dollar and the euro, as well as one-week lows against the pound. The Australian dollar has also come close to breaching the key 0.80 level against the dollar. UBS currency analyst Daniel Katzive noted that the current rebound in carry trade sentiment 'could have a bit further to go' given the thin data calendar this week, though he expects the recent unwinding to resume in the coming weeks. Bank of New York analyst Neil Mellor agrees, arguing that the current volatility in financial markets is not conducive to carry trade plays, which are essentially a risky trade. 'There is too much volatility at the moment. One of the major pillars of the carry trade is smooth trading conditions and currency stability,' he said. Meanwhile, another factor pressuring the yen today was market jitters ahead of the interest rate announcement and accompanying press conference by the Bank of Japan tomorrow. It is set to leave interest rates unchanged and is not expected to raise borrowing costs again until much later in the year. The main focus of attention this week, however, will be on the US Federal Reserve interest rate decision on Wednesday. Though a no-change decision is fully expected, the market will be scrutinising the accompanying statement for hints of a possible move away from their current tightening bias, as well as any reaction to the recent turmoil in financial markets. Dollar sentiment could be bolstered if the Fed 'elects to offer little or no acknowledgement of economic weakness', UBS' Katzive said. Elsewhere, the pound was also firmer, benefiting from the resumption of carry trades on a quiet day for UK news. The rest of the week will see some key events in the UK, however, including CPI inflation and mortgage lending data tomorrow, the minutes to this month's Bank of England interest rate decision on Wednesday and retail sales data on Thursday. Also in focus will be Chancellor of the Exchequer Gordon Brown's presentation of the Budget on Wednesday. London 1647 GMT London 1248 GMT US dollar yen 117.65 up from 117.43 sfr 1.2130 up from 1.2124 Euro usd 1.3293 down from 1.3294 stg 0.6833 unchanged yen 156.38 up from 156.13 sfr 1.6127 up from 1.6120 Sterling usd 1.9449 down from 1.9452 yen 228.83 up from 228.45 sfr 2.3596 up from 2.3588 Australian dollar usd 0.7983 down from 0.7990 stg 0.4104 down from 0.4108 yen 93.96 up from 93.85 New Zealand dollar usd 0.7009 down from 0.7012 [size=1][color=silver][email][email protected][/email] jkm/lam COPYRIGHT Copyright AFX News Limited 2007. All rights reserved. The copying, republication or redistribution of AFX News Content, including by framing or similar means, is expressly prohibited without the prior written consent of AFX News. AFX News and AFX Financial News Logo are registered trademarks of AFX News Limited [/color][/size]