Yen Falls on Speculation China Stimulus Will Boost Carry Trades

By Ron Harui and Stanley White

Nov. 10 (Bloomberg) -- The yen declined for a second day against the euro on speculation China's $586 billion stimulus package will give investors more confidence to buy higher- yielding assets using money borrowed in Japan.

The yen fell the most versus the South African rand and Australia's dollar as the boost to China's economy, the world's fourth largest, improved risk appetite. The dollar also weakened against the euro, the British pound and the Indian rupee after the Group of 20 nations said they are ready to act ``urgently'' to prop up global growth at a meeting yesterday in Sao Paulo.

``China and the tone of the G-20 meeting are clearly going to provide some support to the economic outlook,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``This would reduce risk aversion. The yen looks weak overall.''

The yen fell 1.7 percent to 127.10 per euro at 7:50 a.m. in London from 124.90 late in New York on Nov. 7. Against the dollar, it declined to 99.14 from 98.24. The euro rose to $1.2821 from $1.2718. The British pound advanced to $1.5694 from $1.5643. The yen may decline to 130 versus the euro this week, Morriss said.

Against the South African rand, the yen declined 2.3 percent to 9.8792 from 9.6559. It fell 2.8 percent versus the Australian dollar to 68.13 and 2.1 percent against the New Zealand dollar to 59.33. The three currencies have all weakened at least 30 percent against the yen in the past year as a credit-market collapse reduced carry trades.

In such trades, purchases of higher-yielding assets are funded in nations with low interest rates. The risk is that currency market moves erase the profits. Japan's benchmark rate of 0.3 percent compares with 12 percent in South Africa, 5.25 percent in Australia and 6.5 percent in New Zealand.

Lower Volatility

The yen also weakened as volatility implied by one-month dollar-yen options fell to 23.15 percent from 24.27 percent on Nov. 7, signaling a lower risk of exchange-rate fluctuations that can make carry trades unprofitable.

China's stimulus plan, equivalent to almost a fifth of last year's gross domestic product, is a response to a slump in its major export markets. Japan will contract 0.2 percent next year, the U.S. by 0.7 percent and the euro area 0.5 percent, while China will expand 8.5 percent, the International Monetary Fund said last week. It predicted the first simultaneous recession in the U.S., Japan and euro region in the post-World War II era.

World leaders will meet in Washington on Nov. 15 to discuss their response to the credit crisis. Financial firms worldwide have disclosed $690 billion in losses and asset writedowns since the financial turmoil began last year.

Calm Sentiment

``Optimism over China's stimulus plan is contributing to stock market gains,'' said Takeshi Tokita, vice president of foreign-exchange sales in Tokyo at Mizuho Corporate Bank, a unit of Japan's second-largest publicly traded lender. ``This is helping to calm investor sentiment and causing the yen to weaken.''

The yen may decline to 99.50 per dollar and 128.50 against the euro today, Tokita said.

Brazil, Russia, India and China, the so-called BRIC nations, plan coordinated measures to increase trade and capital flows among their economies, Russian Finance Minister Alexei Kudrin said in an interview on Nov. 8 in Sao Paulo.

The Russian ruble has fallen 8.8 percent against the dollar this year, the Brazilian real has declined 18 percent, while the Indian rupee has weakened by 17 percent. The rupee climbed 0.6 percent to 47.3700 per dollar today.

The yen dropped versus all of the 16 most-active currencies as the MSCI Asia-Pacific Index of regional shares climbed 3.2 percent and the Nikkei 225 Stock Average rose 5.8 percent.

Further Cuts

Gains in the euro may be curbed after European Central Bank President Jean Claude-Trichet told Brazilian broadcaster Globo TV that he can't rule out a further rate reduction.

``There's talk of more ECB rate cuts, given the pessimistic outlook on Europe's economies,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``The medium- to long-term downtrend for the euro is likely to persist.''

Traders increased bets the ECB will reduce its 3.25 percent rate in the first quarter of next year. The implied yield on Euribor interest-rate futures contracts expiring in March fell to 2.990 percent today from 3.005 percent on Nov. 7.

``In December, at our next meeting'' the ECB will have new projections on economic growth and inflation and ``we do not exclude to decrease rates,'' Trichet said, Globo TV reported yesterday, citing an interview.

Technical charts that predict currency movements indicate the dollar may rise this week to so-called resistance at the Nov. 4 high of 100.55 yen, according to Shinko Securities Co.

The greenback is poised to gain after breaking above its 20-day moving average, said Kengo Suzuki, currency strategist at Shinko Securities in Tokyo. Resistance is where sell orders may be clustered.

The dollar may also rise as its daily stochastic and moving average convergence/divergence charts are showing buy signals, Suzuki said. Should the U.S. currency climb above 100.55 yen, it may then move to its Oct. 14 high of 103.07, he said.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomerg.net; Stanley White in Tokyo at swhite28@bloomberg.net.

Last Updated: November 10, 2008 03:01 EST