Even at a 20 year low, there are better sources to fund the purchase of higher-yielding currencies, as well as a second look at funding favorite, Bloomberg Carry traders would do well.
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The yen looks like the perfect well for carry traders to dip into, under pressure from a Bank of Japan determined to keep local yields anchored to the floor even as interest rates around the world push higher. But despite consensus building for further losses, peers look like better funding options on certain key metrics.
According to a Bloomberg analysis of an array of funding currencies, investors may be better off considering the Swiss franc, Taiwan dollar and euro rather than the rapidly weakening yen. These offer a mix of lower implied yields and volatility hallmarks of a desired funding source for carry traders who borrow to buy higher-yielding currencies to earn returns.
The findings suggest that demand to sell the yen for carry purposes may wane, easing pressure on the beleaguered currency, should investors opt for more attractive alternatives.
Yuji Kameoka, chief foreign- exchange strategist at Daiwa Asset Management Co. in Tokyo, said the yen doesn't look like the carry funding currency it used to be.
The Bloomberg GSAM FX Carry Index has gone up over 6% this year, led by stellar returns in Brazil, a bright spot in a volatile market for rates strategies. A gauge of the global bond market has fallen 10% -- set for its biggest loss on record.
An investor looking for a near 20% surge in the Brazilian real against the dollar, a 33% rise versus the yen, would consider the latter to be the optimal funder.
Three-month implied ones, in this case, are taken from the currency forward market. The yen offers a yield of minus 0.4%, while the Swiss franc is more attractive from a funding point of view at minus 0.9%, as is the Taiwan dollar at minus 1.6%.
Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Kokusai Asset Management Co., said the Swiss franc feels like a better choice than the yen as far as yields are concerned. With its extended decline, the question is if it is profitable to carry trades with the yen. After posting its longest losing streak in at least half a century, the yen rebounded on Wednesday.
The stark contrast between the policies of the BOJ and Federal Reserve invites a wave of bets on the yen to weaken further, which is why officials are facing a tough battle to slow down the currency.
The policy difference adds to its appeal as a funding source, implied volatility acts as a counterweight. The Swiss franc burns off its appeal with limited upside seen by investors, while the euro stands out for its higher liquidity.
The analysis of the relative attractiveness of the carry-trade funding currencies was based on five factors including implied yields and volatility. The output for each is an adjusted Z-score which measures them relative to the other currencies - where a higher value points to a more attractive trait as a funding source.
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