Australian Dollar

Traders Bet Australian Dollar Will Rise Against Yen (Update1)
By Liz Capo McCormick
June 4 (Bloomberg) -- Traders are stepping up purchases of options to bet Australia's dollar will rally against the yen as a strengthening Australian economy bolsters demand for the country's assets.
The Australian dollar set a 15-year high versus the yen after government data last week showed Australia's capital spending climbed 9.1 percent in the first quarter, more than double the median forecast. Australia's benchmark interest rate is at 6.25 percent, compared with 0.5 percent in Japan.
Speculators are wagering ``there is more upside room for the Australian dollar,'' said Neil Jones, head of European hedge fund sales at Mizuho Financial Group Inc. in London. ``There are still large amounts of money from Japan looking for high yields. Increasing demand for Australian dollar call'' options ``is set to continue.''
Australia's dollar has risen 8 percent this year to 101.44 yen at 10:20 a.m. in Tokyo. It touched 101.75 yen today, the highest since April 1992. The Australian dollar's gain is the fourth-biggest this year versus the yen among the world's 16 most-traded currencies, after the Brazilian real, and the Canadian and New Zealand dollars.
Demand is growing for call options granting the right to buy the Australian dollar versus the yen, relative to put options giving the right to sell.
The so-called risk-reversal rate measuring this demand was minus 1.1 percent today on a one-month maturity, compared with minus 2.0 percent reached in April, the lowest since October 2003. A higher risk-reversal rate shows greater demand for calls on the Australian dollar relative to puts.
Avoiding Stops
Options are the best way to wager the Australian dollar will gain versus the yen because these contracts allow an investor to hold on to a trade without the risk of having it extinguished by pre-set buy or sell orders, Jones said. In trader jargon, such orders are known as stops.
Australia's economy may grow 3.3 percent in 2008, which would be the economy's 17th straight year of expansion, the Organization for Economic Cooperation and Development said May 24.
Evidence of strength in the world's biggest economy is also boosting the outlook for Australia. A U.S. government report last week showed employers added 157,000 workers in May, compared with 80,000 in April.
``The Australia-dollar exchange rate has now broken the 100.00 level on a more assured basis and looks set to advance further,'' said Derek Halpenny, senior currency economist in London at Bank of Tokyo-Mitsubishi UFJ, Ltd. ``The U.S. payroll data have reinforced the risk appetite in the market. The Aussie dollar will do well as long as the global outlook is robust.''
Yield Difference
In a sign of quicker Australian export growth, the trade deficit of the world's largest exporter of iron ore and coal narrowed in April to A$962 million from A$1.63 billion, a government report showed last week.
At 6.08 percent, 10-year Australian government debt yields about 4.28 percentage points more than similar-maturity Japanese bonds. The yield premium reached 432 basis points on May 22, the widest in two years.
Australia's central bank may have to raise rates to quell inflation, the OECD said last month. The Reserve Bank of Australia has kept rates unchanged this year, after raising borrowing costs three times last year.
Gains in global stocks have also made investors more confident in the so-called carry-trade strategy, where they borrow in Japan to buy assets in higher-yielding currencies.
The U.S. Standard & Poor's 500 stock index reached a record high last week. The Morgan Stanley Capital International Asia Pacific Index of shares added 2.5 percent last week, the most since March, even after a tumble in Chinese shares.
`Increase in Confidence'
``Institutional investors and hedge funds overwhelmingly have an increase in confidence that the market can absorb bouts of increased risk aversion,'' Jones said. Mizuho forecasts Australia's dollar will appreciate as much as 8.5 percent to 110 yen in about seven weeks.
Falling volatility in currencies is encouraging investors to buy riskier assets.
A JPMorgan Chase & Co. index tracking three-month implied volatility on major currencies fell to 5.95 percent on May 31, the lowest since the index began in June 1992. Traders quote implied volatility, a measure of expected swings in exchange rates, as part of setting options prices.

**Original Source = Bloomberg.com**