Abe-Bernanke one-two punch crushes carry trade

‘Threw Kerosene’

On June 14, the yen rallied further after minutes from the BOJ’s latest meeting showed one policy maker advocated restricting stimulus to a two-year period.

“Japan created a fire in its backyard, which basically means they threw kerosene on the fire that was already taking place here,” Alejandro Silva, who helps oversee $800 million in emerging-market assets at Silva Capital Management, said by phone from Chicago. “Instead of getting reassurance that perhaps there would be another central bank that would be providing quantitative easing in larger scale to accommodate for the fact that perhaps the Fed would taper, what you got was nothing of that nature.”

Yujiro Goto, a currency strategist at Nomura, says Mexico’s higher interest rates will continue to lure Japanese investors.

‘Very Popular’

“In terms of May, Mexico was still a very popular investment decision for Japan in toshin or uridashi market,” he said by phone from New York. “That will not change so much in the near future.”

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries fell seven basis points, or 0.07 percentage point, to 190 basis points at 2:07 p.m. in New York, according to JPMorgan Chase & Co.

The cost to protect Mexican debt against non-payment for five years with credit-default swaps rose four basis points to 119 basis points, according to data compiled by Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

The peso fell 1.2% to 12.8607 per dollar.

Yields on interbank rate futures contracts due in December, known as TIIE, fell three basis points last week to 4.30%.

‘Crowded Trade’

Hedge funds and other large speculators cut bets that the currency would gain against the U.S. dollar to a net 63,774 on June 11, the least in 10 months, according to data from the Washington-based Commodity Futures Trading Commission.

“It was a crowded trade that was unwound because you had the Fed spooking a lot of people believing that quantitative easing would stay intact,” Silva said. “Secondarily, call it insult to injury, the Japanese just didn’t really come through with what the market had just sort of hoped would be a larger stimulus plan.”

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