Yen Tumbles as Global Recovery Signs Reduce Demand for Refuge

The yen touched an eight-week low versus the euro as signs the global economic recovery is gathering steam damped demand for Japan’s currency as a refuge.

The Japanese currency headed for its biggest monthly drop in a year versus the euro before a report tomorrow that may indicate confidence among Japan’s large manufacturers increased, boosting appetite for investments in countries with higher long- term interest rates. The franc climbed to a record against the euro as Swiss leading economic indicators rose in March to the highest level since November 2007.

“There’s a tremendous amount of pressure to push the yen lower in the next few days,” said Sebastien Galy, a currency strategist at BNP Paribas SA in New York. “The market is expecting Japanese institutional investors to be chasing steepness in yield curves globally in relatively safe places.”

The yen depreciated 1.6 percent to 126.40 per euro at 2:01 p.m. in New York, from 124.44 yesterday, after touching 126.56, the weakest level since Feb. 3. It dropped 0.7 percent to 93.39 per dollar, from 92.76, after reaching 93.63, the weakest since Jan. 8. The euro climbed 0.9 percent to $1.3533, from $1.3414.

U.S. 10-year note yields have climbed 63 basis points, or 0.63 percentage point, to 3.82 percent since the end of November. Yields on comparable Japanese securities rose 14 basis points to 1.395 percent.

The Swiss franc gained as much as 0.7 percent to 1.4209 per euro, the strongest since the 16-nation currency’s 1999 debut, before trading at 1.4231, up 0.5 percent. It strengthened 4.2 percent for the quarter.

Monthly Loss

The Japanese currency was poised for a 4.2 percent loss versus the euro this month, the biggest since it tumbled 5.7 percent in March 2009. The yen headed for a 4.8 percent drop against the greenback, its biggest monthly decline this year.

The losses accelerated in New York trading as Japan’s fiscal year ended today, encouraging traders to place fresh bets on yen weakness on speculation Japanese companies had finished sending earnings back home. The yen fell the most this month against the euro among 16 major counterparts, exceeding the 0.3 percent drop of the Swedish krona, the second-worst performer, by more than 10 times.

“The fear was that heading into this fiscal year-end there would have be a significant potential for a pickup in repatriation of earnings back to Japan,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “If those flows have materialized, it’s had very little supportive impact on the yen.”

Yen Outlook

Japan’s currency will probably fall 2.7 percent to 96 versus the dollar in the next six months as the Bank of Japan continues stimulating the economy, Hardman predicted. The Federal Reserve said on March 16 it would stop purchasing mortgage debt this month.

The yen briefly pared losses against the dollar and euro earlier today after a report showed companies in the U.S. unexpectedly cut payrolls in March. The 23,000-position decline shown by data from ADP Employer Services compared with a gain of 40,000 forecast in a Bloomberg News survey.

Today’s advance by the euro reduced its loss against the dollar in the first quarter to 5.5 percent. The drop, on concern Greece’s debt crisis will derail the region’s economic recovery, would still be the worst performance since an 11 percent decrease in the three months ended September 2008.

U.S. Rate Bets

Futures on the CME Group Inc. exchange showed a 56 percent chance the Fed will raise its target rate for overnight lending between banks by at least a quarter-percentage point by its November meeting, compared with 48 percent odds a month ago. The central bank has kept the target interest rate in a range of zero to 0.25 percent since December 2008.

The U.S. Labor Department’s nonfarm jobs report on April 2 is forecast to show employers added 184,000 positions, the most in three years, a Bloomberg survey of 81 economists shows.

Australia’s dollar fell for the first time in three days, dropping as much as 0.7 percent to 91.31 U.S. cents. The Bureau of Statistics said the nation’s retail sales tumbled 1.4 percent in February. Economists in a Bloomberg News survey forecast a 0.3 percent increase.

“That was a very awful set of retail sales numbers with broad-based losses,” said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong.

The Aussie has climbed 2.3 percent against the greenback this quarter after Reserve Bank of Australia Governor Glenn Stevens raised the benchmark cash target in March to 4 percent.

The U.S. dollar’s share of global currency reserves rose to 62.1 percent in the fourth quarter of 2009, and the euro’s share dropped to 27.4 percent, the International Monetary Fund said today in a quarterly report.

The yen’s share dropped to 3 percent from 3.2 percent and the British pound held at 4.3 percent in the period ended Dec. 31, the Washington-based fund said.

Mexico Peso, Bonds Gain as Debt Eligible for Citigroup Index

Mexico’s peso advanced to a 17- month-high and local bonds gained as Citigroup Inc. said the country’s securities are eligible to be included in its World Government Bond Index, helping luring foreign investors.

The peso jumped as much as 0.6 percent today, extending a 6.1 percent rally that has made it the best performer among the 16 most-traded currencies in the world this year. The yield on the country’s benchmark peso bonds due in 2024 fell five basis points to a one-month low of 7.92 percent on speculation Citigroup’s move will prompt investors who use the index as a benchmark to buy Mexican securities.

“This adds to the positive sentiment to the peso,” said Flavia Cattan-Naslausky, an analyst with RBS Securities Inc. in Stamford, Connecticut.

The currency was up 0.2 percent today to 12.3379 per U.S. dollar at 1:13 p.m. New York time, after earlier reaching 12.2921, the strongest level since October 2008.

The peso’s surge this year, the most among the 16 major currencies and the second-most among the 26 most-traded emerging market currencies, has been fueled by rising demand for its exports as the U.S. economy, Mexico’s biggest trade partner, recovers from a recession.

The yield on Mexico’s 10 percent peso bonds due in 2024 has declined 35 basis points, or 0.35 percentage point, from 8.27 percent on Dec. 31, according to Banco Santander SA. The price of the securities rose 0.47 centavo to 117.97 centavos per peso today, extending their advance this year to 3.19 centavos.

Put Options

Citigroup said that Mexican debt will join its World Government Bond Index after the county meets the criteria for three straight months, becoming the first Latin American country in the index, Citigroup said in an e-mailed statement. The debt may enter by October, the New York-based bank said in a statement.

Mexico “satisfies all three World Government Bond Index requirements -- size, credit and barriers to entry,” Citigroup said.

Mexico’s central bank is scheduled today to auction $600- million-dollar worth of put options, which allow it to sell the peso for the U.S. currency. Mexico’s central bank started to auction the options in February to accumulate foreign reserves. All of the options the bank sold last month were exercised by investors as the peso strengthened.

Dollar Losing Carry-Trade ‘Allure,’ Morgan Stanley’s Leven Says

The dollar is losing its popularity as a funding currency in the carry trade, in which investors buy higher-yielding assets with amounts borrowed in nations with low interest rates, according to Ronald Leven, a senior currency strategist at Morgan Stanley.

While carry-trade demand is increasing as investors seek riskier assets, rising Treasury yields and speculation the Federal Reserve will rate interest rates sooner rather than later will damp the greenback’s use, New York-based Leven said in an interview yesterday. Low U.S. borrowing costs had encouraged investors to use the dollar instead of the yen.

“It seems anecdotally there’s some shifting away from the dollar,” Leven said. “Now that we’re starting to see the curve in the U.S. steepen and the market is thinking in terms of Fed tightening, the dollar seems to be losing its allure as a funding currency.”

Futures on the CME Group Inc. exchange showed a 44 percent chance Fed policy makers will increase the overnight target rate by at least a quarter-percentage point by the September meeting, compared with 32 percent odds a month ago. The yield curve, which plots the rate of Treasuries according to their maturity, has steepened as the gap between 2- and 10-year yields widened beyond levels last seen during the recovery after the 2001 recession.

In the carry trade, investors put the borrowed money into assets in countries with higher interest rates, such as Australia, where the benchmark is 4 percent, and South Africa, where it is 6.5 percent. Rates are 0.1 percent in Japan and zero to 0.25 percent in the U.S. The risk is that market moves can erase profits.

“The Aussie’s really by measures I think the best carry trade, even across emerging markets -- not the highest on an absolute basis, but by history and volatility,” Leven said.

Rising equity prices should renew interest in carry trade, which is still thin by historical standards, he said.

Canada Dollar Rises as Economy Grows at Fastest in Three Years

Canada’s dollar reached the highest level in almost two weeks versus its U.S. counterpart after a report showed the nation’s economy grew at the fastest pace in three years in January.

Canada’s currency, nicknamed the loonie, is poised for a 3.8 percent gain in the last three months, the fourth consecutive quarterly advance and the longest streak since 1988. Gross domestic product increased 0.6 percent from December, the fifth straight gain and the biggest since December 2006, Statistics Canada said today in Ottawa.

“It’s become typical for data from the Canadian economy to surprise on the upside and strong economic performance pushes the currency higher,” said Aaron Fennell, a futures and currency broker in Toronto at Lind-Waldock, a unit of MF Global Canada. “Looking further into the future, it’s hard to see the Canadian economy and dollar not doing well. It’s a structural bull market for the next decade.”

The Canadian currency appreciated 0.5 percent to C$1.0151 per U.S. dollar at 2:19 p.m. in Toronto, from C$1.0201 yesterday. It touched C$1.0130, the strongest level since March 19. One Canadian dollar buys 98.51 U.S. cents.

Crude for May delivery rose 1.5 percent to $83.62 a barrel on the New York Mercantile Exchange. The Standard & Poor’s 500 Index rose less than 0.1 percent. The loonie tends to track commodities and equities.

‘Solid Momentum’

Economists surveyed by Bloomberg News had predicted the economy would expand 0.5 percent in the first month of 2010, according to the median of 20 estimates.

The report suggests first-quarter economic growth is still coming in faster than the Bank of Canada predicted, after output expanded at the highest quarterly rate since 2000 in the October-December period.

“There are some good signs, there are some consistent signs,” in Canada’s economy, Finance Minister Jim Flaherty told reporters in Ottawa today. “It’s too early to say that we are out of the woods yet.”

Governor Mark Carney signaled last week the central bank may raise interest rates as soon as June as inflation and growth outpace forecasts.

The GDP report “starts the first quarter with solid momentum and fits with that positive vibe the Canadian economy has had for some time,” said David Watt, senior currency strategist in Toronto at Royal Bank of Canada, Canada’s biggest bank. “The takeaway should be positive.”

‘Pressing Parity’

The loonie reached C$1.0062 on March 19, the strongest level since July 23, 2008. The currency rose to parity with the greenback in September 2007 for the first time in three decades amid booming demand for raw materials. It was last at parity on July 22, 2008, and then lost 18 percent that year as the credit crisis crushed demand for commodities.

“The Bank of Canada has been on record saying they’re looking to raise interest rates and tighten liquidity, and there hasn’t been anything to indicate they shouldn’t,” said Lind- Waldock’s Fennell. “That’s why the Canadian dollar is pressing parity. The last time we saw parity a few years ago it didn’t stick. This time it will be a permanent move.”

An hourly close, or a price below the C$1.0154 resistance level at the beginning and end of any given hour of trading, could push the Canadian dollar to C$1.0091 and C$1.0064, George Davis, chief technical analyst in Toronto at Royal Bank of Canada, wrote in a research note.

Resistance refers to areas on charts where buy or sell orders may be clustered and signals a currency may move to the next level if it is exceeded.