Hong Kong currency traders short euro as Europe prepares for crisis talks

Hong Kong currency traders short euro as Europe prepares for crisis talks
Leo Lewis From:The Times May 20, 2010

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ONE OF Asia's largest investment funds is poised to deliver a major blow to the euro as financial institutions across the region lay large bets against the faltering currency.

Multi-billion sales of euro investment assets come as Asian investors have begun to lose their nerve over the European economy.

In Beijing, policymakers are trying to assess how prolonged weakness of the euro will affect their plans to project the Chinese yuan as an international currency.

In the currency markets overnight, the euro rose 1.5 per cent against the US dollar on speculation the European Central Bank could take steps to try to arrest the euro’s decline. In late New York trading, the euro was at $US1.2391, up $US1.2209 late in the previous session.

The embattled euro's gyrations came as European ministers prepared for crisis talks to shore up the currency

Prominent economists in Japan, addressing an audience where hundreds of thousands of households play the international foreign exchange markets, are already describing the €750 billion ($1.4 trillion) rescue package as being like a "picture of a rice cake" - attractive, but without nourishment.

Several of Asia's powerful national or "sovereign" wealth funds said that currency traders in Hong Kong had started to build sizeable "short" positions in the euro - betting that the currency has farther to fall and hedging against the losses that they would make if previous bets on the bonds of Greece, Portugal, Spain, Ireland and Italy turned sour.

However, analysts said that a decision by Kokusai Asset Management could be a critical point for the euro.

Within the past few weeks the Kokusai's famous Global Sovereign Open fund, which is closely followed in the market, has twice reduced the amount of euro assets that it holds in favour of what it calls more "stable" investments such as Canadian dollars and Swedish kronor.

In late December, the fund issued a financial vote of no confidence in Greece.

Having been the largest non-governmental investor in Greek bonds in 2009, it sold its entire holding in the last few trading days of the year.

The fund, which manages more than $US60bn ($67bn), usually expects to have about a third of its money in euro-denominated bonds.

That was recently reduced to just under 30 per cent and was lowered again a week later.

The company has not ruled out lowering it farther still, and Tokyo foreign exchange dealers believe that it will do so tomorrow.

Yunosuke Ikeda, a foreign exchange specialist at Nomura, the Tokyo-based brokerage, said that Kokusai was not the only big Asian fund cutting its exposure to the euro. "It is quite representative," he said.

Others believe that Asia's new-found disdain for the euro has been exaggerated.

There are also risks that some less reputable investors will try to undermine confidence in the euro in the hope of profiting from it.

Individual Japanese investors, people often characterised as "Mr and Mrs Watanabes", who exert occasional bursts of significant market influence, have bought the euro.

Naomi Fink, chief foreign exchange strategist at Bank of Tokyo Mitsubishi, said that the recent drop in the euro against the yen was a rebalancing of what had been an overvalued currency.

"This is not a disaster for the euro," she said. "It is the market returning it to a more realistic level."

Shell-shocked European ministers are preparing for crisis talks to shore up the single currency after markets were plunged into turmoil by panic measures in Germany.

Angela Merkel stunned EU capitals by warning that the euro was in danger and triggered fears of a fresh financial meltdown by announcing a surprise ban on risky trading practices by market speculators.

The German Chancellor's actions opened up new cracks in the single currency, drawing sharp criticism from France and prompting Brussels to issue an appeal for unity.

European finance ministers, who have barely had time to catch their breath after hammering out a massive rescue plan for Greece, will hear controversial calls from Germany at a meeting tomorrow for changes to the Lisbon treaty to give Brussels powers to co-ordinate national budgets.

Ms Merkel believes that the EU should have stronger powers to organise the "orderly insolvency" of countries such as Greece that set giveaway budgets with no means of paying for them.

After announcing a ban on speculative share trading in Germany's top financial institutions and the bonds of eurozone countries until next March she warned: "This challenge is existential and we have to rise to it. The euro is in danger. If we don't deal with this danger, then the consequences for us in Europe are incalculable... if the euro fails, then Europe fails."

Additional reporting: David Charter, Berlin