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Thursday March 15, 2007 - 09:18:46 GMT
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FOREX NEWS-Yen carry trade unwinding stalls as stocks recover

FOREX-Yen carry trade unwinding stalls as stocks recover
Thu Mar 15, 2007 5:06am ET18

By Toni Vorobyova

LONDON, March 15 (Reuters) - The yen's broad rally against other major currencies paused on Thursday as a recovery in global stock markets made investors slightly more comfortable about yen-funded carry trades.

U.S. producer prices, capital flows and factory data, all due for release later in the session, will be in focus given the recent rise in risk aversion was in part prompted by concerns about the health of the world's largest economy.

Sharp falls in equity markets had quelled risk appetite and made currency investors less keen to borrow low-yielding currencies like the yen to fund investments in higher return units like sterling or the dollar.

Now, a recovery in shares has prompted some to go back into carry trades, which still look attractive from a yield perspective -- Japanese rates are just 0.5 percent compared to 5.25 in Britain and 7.5 percent in New Zealand.

"The main driver (for currencies) is not fundamental issues, it's really driven by risk aversion, the equity market performance," said Mitul Kotecha, head of FX strategy at Calyon.

"The fact that yesterday we had a bit of a gain in U.S. equities, and a stronger performance in Asian equities overnight helps reduce risk aversion slightly and the yen has come under a bit of pressure as the volatility of carry trades continues."

European stocks opened around 1 percent higher <.FTEU3> on Thursday, after similar scaled gains in Tokyo's Nikkei index overnight <.N225> and gains on Wall Street on Wednesday.

By 0840 GMT, the dollar was up 0.1 percent at 117.17 yen and the euro was steady at 154.81 yen .

Sterling, which had been a key beneficiary of carry trades and has thus suffered more than some of the other currencies during their unwinding, stabilised at 226.51 yen .

The euro ticked down to $1.3205 .


Euro zone February inflation data are due at 1000 GMT with the year-on-year rate expected to be confirmed at 1.8 percent.

European Central Bank Governing Council member Klaus Liebscher said on Thursday that euro zone monetary policy remained relaxed given strong economic growth and that he saw inflationary risk rising towards the end of this year.

Fellow Governing Council member Nicholas Garganas said the bank was determined to act promptly to monitor price stability

The ECB is expected to raise rates to 4 percent in coming months but has signalled that policy may be nearing its peak.

Thursday features two central bank decisions, with the Norges Bank expected to raise rates to 4 percent and the Swiss National Bank seen hiking to 2.25 percent, both at 1300 GMT.

In the U.S., February producer prices are due at 1230 GMT, followed by January net capital inflows numbers at 1300 GMT and the Philadelphia Fed's survey of March factory activity in the U.S. Mid-Atlantic region at 1600 GMT.

Any signs of weakness in the data could boost expectations of a Federal Reserve rate cut later this year, and would probably lead to a fresh bout of risk aversion.

"A combination of weak activity and high inflation data is probably the worst outcome for equities and related high beta markets such as emerging market currencies," BNP Paribas said in a research note.

Investors will also be looking for any more news from U.S. subprime mortgage lenders, amid concern that trouble in that sector could spill out in to the wider housing market.

© Reuters 2007. All Rights Reserved.


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