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JPY rallies on carry trade unwinding

Fri, Aug 10 2007, 02:05 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

New Zealand dollar

Sub-prime fears overshadow solid data. NZ’s unemployment rate fell to 3.6% yesterday, lower than the markets forecast of 3.7% and signalling to investors that interest rate cuts may be some way off. The NZD rallied from around 0.7670 to it intra-day high of 0.7704 on the back of this data, before being pegged back throughout the day. Offshore overnight the focus again turned to US Sub-prime mortgages as the Dow Jones fell by over 2% and the European Central Bank was forced to provide liquidity to the market. The NZD fell sharply on the back of this news, falling from 0.7685 on opening to 0.7526 as investors quickly unwound recent carry trade positions.

Australian dollar

Risk aversion reigns supreme. Like its kiwi cousin the AUD rallied yesterday as stronger than expected labour data added weight to the case for the RBA raising interest rates again. This result was the ninth consecutive month that employment has risen and saw the AUD trade up to its intra-day high of 0.8656. Any gains were short-lived however as the AUD was hit hard by renewed Sub-prime fears falling more than 150pts overnight to close at 0.8485. Strong off-shore selling of AUD/JPY saw renewed pressure on this currency pair with risk aversion paramount in the current market climate.

Major currencies

JPY rallies on carry trade unwinding. The JPY rallied sharply overnight as investors bailed out of carry trades after Frances largest bank, BNP Paribas, announced they had temporarily suspended redemptions at three funds because it was not possible for them to fairly value their holdings over US sub-prime mortgage losses. The knock-on effect was widespread, with the Dow falling over 380 points at time of writing while European and US overnight interest rates spiked sharply higher. Higher yielding currencies, including CAD, AUD and NZD, suffered as investors hastened to unwind carry trades. The markets ignored data which showed jobless claims in the US rose 7k last week, slightly higher than expected but still underscoring steady labour market conditions.

Economic data and events

US initial claims up 7k to 316k. Initial jobless claims in the last two weeks have reversed the declines they posted earlier in July. These swings are within the normal range of volatility for this series, although they could reflect seasonal adjustment difficulties associated with the temporary shutdown of auto plants for new model retooling. Continuing claims jumped in the prior week, taking them back near their highs seen earlier in July. Nothing too remarkable here, although the latest weekly results for both series do leave a slightly less robust labour market impression (that may be reversed next week of course).

US chain store sales accelerated from 2.4% yr to 2.6% yr in July, not especially strong but broadly in line with the message from the weekly reports through the month. It is probably enough to deliver a modest rise in ex auto and gasoline retail sales, when the Commerce Department’s July figures are released next week.

Canadian housing starts were soft in June and July, reversing the sharp bounce in May. In the latest month, the 4.3% decline was led by multiples, but single family house starts also fell, down 2.7% (their first decline in five months). Still, with building permits trending up sharply in recent months, and new house prices posting solid gains, we expect to see building activity pick up smartly later in the second half of this year.

Sub-prime fall-out biting in Europe. The fall-out from the sub-prime housing market crisis in the US hit the European banking sector last night. A major French bank prevented withdrawals from three of its investment funds because it couldn’t revalue the funds’ assets. Banks became reluctant to lend to each other and interbank rates shot up, such that the European Central Bank felt compelled to provide liquidity. The €95bn it provided represented the largest cash injection in the ECB’s 9 year history, surpassing even the €69bn injection on the day after the September 11 terror attacks. The ECB’s action encouraged further decline on European equity markets, on the basis that “the ECB must know more than we do and there is another shock coming”.

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Published on  Fri, Aug 10 2007, 02:08 GMT