You are here

Currency market rigging on a vaster scale than ever

Section: Daily Dispatches

Yen Action Sets Scene for Return of Carry Trade

By Peter Garnham and Lindsay Whipp
Financial Times, London
Wednesday, March 23, 2011

The billions of dollars in yen sold by the world's most powerful central banks have sent a strong message to speculative investors. Those daring to bet that the Japanese currency will again test Y76.25, the record high against the dollar it hit last week before the G7's intervention, better have deep pockets.

Indeed, now that the world's richest nations have pledged to back Tokyo in its efforts to halt the yen's appreciation, some strategists are predicting a new set of trading patterns in foreign exchange markets. The yen, they say, could make a return as investors' currency of choice for making so-called "carry trades."

The carry trade, in which the purchase of riskier, higher-yielding assets is funded by selling low-yielding currencies, is a popular investment employed by investors to take advantage of rising asset markets.

... Dispatch continues below ...


The Gold Standard Now: It Can Work

Today a dollar is worth 80 percent less than it was 40 years ago, and less than 5 percent of its value a hundred years ago. We deserve a dollar that is as good as gold, a dollar that will hold its value from year to year so we can be financially secure and our economy can generate more and better jobs.

For most of America's history, our dollar was literally as good as gold. But on August 15, 1971, our politicians destroyed the link between gold and the dollar. They destroyed the foundations of our economic system.

A new Internet site,, provides news and cutting-edge analysis about this most important issue and explains how the gold standard worked in the past and how it can work in the future. Visit us today:

Before the financial crisis, the low-yielding yen was widely used to fund investments in a wide range of risky assets such as equities, commodities, property, and higher-yielding currencies such as the Australian dollar. This sent the yen down to multi-year lows against a raft of currencies.

But the wave of deleveraging that followed the credit crunch saw the yen rally sharply as asset prices tumbled. Investors abandoned carry trades funded in the Japanese currency. The yen has risen more than 30 per cent against the dollar since Lehman Brothers’ collapse in 2008.

All that, though, could be about to change if the belief that central banks have imposed a ceiling on the yen gains traction. And a return of the carry trade would have the potential to lift prices of risky assets -- equities and commodities are already well into a bull run -- even further, analysts say.

"There is another wave of global liquidity in the making, this time coming out of Japan. This liquidity will not stay in Japan and will boost asset prices elsewhere," says Hans Redeker at BNP Paribas

The impact of currency intervention, if sustained, could have a similar effect to the US Federal Reserve's preparations in the summer of 2010 for a second round of "quantitative easing," its huge bond-buying programme to kick-start recovery. The Fed's action lifted shares and weakened the dollar.

"This time it will be the yen funding another rush into global assets," says Mr Redeker. "We buy aggressively into risk and see the yen moving lower."

Mansoor Mohi-uddin at UBS says yen-funded carry trades are likely to make a comeback as other central banks outside Japan prepare to tighten monetary policy while Tokyo keeps conditions ultra-loose to deal with the effects of this month’s earthquake and hold the yen in check.

The Fed is due to end its "QE2" programme in June and the European Central Bank is expected to raise interest rates as early as next month, while the Bank of England is forecast to tighten policy later this year. The success of a carry trade investment strategy requires not just stability in asset markets but a steadily weakening funding currency. The joint action from leading central banks to intervene to stem strength in the yen could help to provide both.

Traders cite a range of factors that led to last week's spike. These include expectations that Japanese institutions would repatriate funds to pay for post-earthquake reconstruction costs and speculative momentum as traders taking advantage of the move upwards forced buying by investors squaring bets against the yen. "Should it have continued, it risked a significant destabilisation in the financial and economic foundation of Japan," says Camilla Sutton at Scotia Capital.

Ms Sutton says the G7 stepped in to weaken the yen not so much because the value of the Japanese currency had become extreme but because the yen-dollar trading pattern had become disorderly and threatened global economic and financial stability.

"This type of volatility in currencies threatens much more than the economic recovery of the world's third-largest economy. Above all the G7's role was to stabilise global markets," she says. The action, which drove the yen down to Y81, where it has stayed, helped shares recover their poise after a volatile week.

Expectations of further currency intervention to come, combined with the Y40,000 billion asset purchase programme announced by the Bank of Japan, means yen liquidity can only grow in coming months. Thus the G7 has stabilised not only the asset side of the yen carry trade but the funding side too.

Mr Mohi-uddin says the G7's efforts to weaken the yen are also likely to succeed because they are consistent with the expectations for future interest rate changes outside Japan. "So investors should should forget about yen strength," he says. "Instead carry trades are clearly making a comeback as reduced investor risk aversion following the G7 intervention allows hawkish central banks to consider raising interest rates."

Of course, any evidence of widespread yen repatriation by Japanese institutions may yet trigger renewed yen strength. For now, though, a return of the carry trade should come as welcome news in Tokyo as Japan tries to rebuild.

* * *

Join GATA here:

An Evening with Bill Murphy and James Turk
Sponsored by Deutsche Edelmetall-Gesellschaft
Friday, April 29, 2011
Hofbrauhaus, Munich, Germany

Support GATA by purchasing gold and silver commemorative coins:

Or by purchasing a colorful GATA T-shirt:

Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009:

Or a video disc of GATA's 2005 Gold Rush 21 conference in the Yukon:

Help keep GATA going

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at:

To contribute to GATA, please visit:


Prophecy Resource Spins Off Platinum/Palladium Venture:
World-Class PGM Deposit in Yukon

Company Press Release, January 18, 2011

VANCOUVER, British Columbia -- Prophecy Resource Corp. (TSX-V:PCY)and Pacific Coast Nickel Corp. announce that they have agreed that PCNC will acquire Prophecy's Nickel PGM projects by issuing common shares to Prophecy.

PCNC will acquire the Wellgreen PGM Ni-Cu and Lynn Lake nickel projects in the Yukon Territory and Manitoba respectively by issuing up to 550 million common shares of PCNC to Prophecy. PCNC has 55.7 million shares outstanding.

Following the transaction:

-- Prophecy will own approximately 90 percent of PCNC.

-- PCNC will consolidate its share capital on a 10 old for one new basis.

-- Prophecy will change its name to Prophecy Coal Corp. and PCNC will be renamed Prophecy Platinum Corp.

-- Prophecy intends to distribute half of its PCNC shares to shareholders pro-rata in accordance with their holdings.

Based on the closing price of the common shares of PCNC on January 17, $0.195 per share, the gross value of the transaction is $107,250,000.

For the complete announcement, please visit: