Yen's Biggest Drop in Decade No Anomaly With Options
Dec. 7 (Bloomberg) -- Options traders are growing lessbullish on the yen after efforts by Japanese officials to boostthe world’s second-biggest economy and a U.S. jobs report led tothe currency’s biggest weekly decline in a decade.
Japan’s currency plunged 2.5 percent against the dollar and1.3 percent versus the euro on Dec. 4 after the U.S. LaborDepartment said employers cut the fewest jobs since therecession began. The yen rose against the dollar today, aftersinking last week by the most since February 1999, extending aretreat from a 14-year high. Traders sold yen and bought dollarson speculation U.S. interest rates will increase before June.
“The improving U.S. jobs market suggests the FederalReserve won’t stand pat on interest rates longer than the Bankof Japan,” said Kazutoshi Yasuda, general manager of themarkets department in Tokyo at FX Prime Corp., a unit of ItochuCorp. Increased U.S. borrowing costs would lead traders to favorusing yen to finance higher-yielding investments, leading tomore losses for the Japanese currency, he said.
Options showed declining bets the yen will rise. The oddsfor a gain to 84.5 yen per dollar by the end of March from 90.56last week fell to 38 percent from 80 percent on Nov. 30, datacompiled by Bloomberg show. Chances of a decline to 92 versusthe dollar by Dec. 31 reached 63 percent. Options grant buyersthe right to purchase or sell an asset at a predetermined price.
Weekly Tumble
The yen tumbled 3.6 percent versus the euro last week, thesharpest slide since the five days to April 3. The yen also fell4.5 percent against the dollar, the most since the week endedFeb. 19, 1999, when it slumped 5.9 percent. The yen’s biggestdrop during the week came after the U.S. Labor Department saidpayrolls dropped by 11,000 last month, the smallest decreasesince the recession began.
The yen traded at 89.98 per dollar as of 6:35 a.m. in NewYork, from 90.56 last week, and 133.26 per euro from 134.54.
“What the job numbers do is firm up expectations that theFed interest-rate hike is coming,” said Camilla Sutton, astrategist in Toronto at Bank of Nova Scotia, the nation’sthird-largest lender. “That should be a strong-dollar story.”
Federal-funds futures contracts on the Chicago Board ofTrade show a 43.3 percent probability the U.S. central bank willraise its target rate for overnight bank borrowing to 0.5percent by June from the current range of zero to 0.25 percent,up from 12.6 percent odds a month ago.
‘Finally Turning’
UBS AG expects the Fed to set its key rate at the top endof its 0.25 percent range in April and follow with a quarter-point increase in June. The jobs report and last week’s gains“suggest the greenback is finally turning,” Mansoor Mohi-uddin, the Zurich-based bank’s global head of currency strategy,wrote in a note to clients.
The yen was the best performer against the dollar among the16 most-traded currencies the past four years, Bloomberg datashow. It surged to 84.83 on Nov. 27, the strongest since July1995, from 124.13 in June 2007. The yen tends to advance amidfinancial turmoil because Japan’s trade surplus reduces relianceon foreign capital.
Record low U.S. interest rates have kept the dollar underpressure at the expense of the yen, making the greenback thefavorite for so-called carry trades, where investors raise fundsin countries with low borrowing costs and use the proceeds toinvest in countries with higher returns.
Benchmark rates of as low as zero in the U.S. and 0.1percent in Japan compare with 3.75 in Australia and 2.5 percentin New Zealand.
Libor
The London interbank offered rate, or Libor, for three-month loans in the U.S. currency has been below the equivalentyen rate since Aug. 24. In the decade before then, the dollarrate averaged 2.94 percentage points more than the yen rate.
Contracts betting the yen would climb against the dollarrose to 51,710 on Nov. 27, the most since May 2008, according tothe Commodities Futures Trading Commission in Washington basedon contracts at the Chicago Mercantile Exchange. As recently asJune, there more contracts betting on a decline than a gain.
Such “extreme” positioning may suggest that the declinein the yen represents traders unwinding “long” positionsrather than an outright bet on the currency’s depreciation, MarcChandler, the global head of currency strategy at Brown BrothersHarriman & Co. in New York, said in a note to clients on Dec. 4.
The median estimate of more than 30 strategists surveyed byBloomberg is for the yen to end March at 92 to the dollar and136 to the euro.
‘Urgent Steps’
Fujio Mitarai, head of Japan’s largest business lobby,called on the government to take “urgent steps” on Nov. 27 tocurb gains in the yen, which make Japanese exports lesscompetitive and threaten corporate profits. The same day,Finance Minister Hirohisa Fujii said in Tokyo the nation will“do what is necessary” and he may contact U.S. and Europeanofficials to act.
Exports make up about 12 percent of Japan’s economy,compared with 6 percent in the U.S. The nation’s gross domesticproduct is forecast to shrink 5.7 percent this year, accordingto the median estimate of economists surveyed by Bloomberg. Thatcompares with a contraction of 2.4 percent in the U.S.
The Bank of Japan announced an emergency 10 trillion yen($113 billion) credit program on Dec. 1 to combat falling pricesand the stronger yen. The spread between dollar- and yen-basedLibor narrowed to 2.72 basis points on Dec. 4 from as much as7.25 basis points on Sept. 8.
Stimulus Plan
“The BOJ’s action worked,” said Masato Mori, seniormanager of the business and marketing department at NTTSmartTrade Inc. a unit of Nippon Telegraph & Telephone Corp.“Stopping the yen’s advance will require additional spendingfrom the government.”
A stimulus plan worth as much as 4 trillion yen may beagreed upon today, Chief Cabinet Secretary Hirofumi Hirano saidlast week. The government planned to announce the measures onDec. 4 before disagreements between Prime Minister YukioHatoyama’s ruling Democratic Party of Japan and coalitionpartners, who want a larger package, caused a delay.
Bonds to be issued in the fiscal year starting April 1 mayreach 146.2 trillion yen compared with a revised 132.3 trillionyen this year, according to Citigroup Global Markets Japan Inc.
“There is probably enough in the policy action in Japan bythe government and the BOJ to argue for further upside on cross-yen currencies near term,” said Greg Gibbs, a foreign-exchangestrategist at Royal Bank of Scotland Group Plc in Sydney.
To contact the reporters on this story:Yasuhiko Seki in Tokyo at yseki5@bloomberg.net;Ron Harui in Singapore at rharui@bloomberg.net.
Last Updated: December 7, 2009 06:42 ESTSource: Bloomberg
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