FX update 22.05.07

Yen falls to a new low on carry trades, and speculation that Japanese bonuses would be ploughed in overseas higher yielding assets. trading at 121.66. There is a resistance at 122. Markets are predicting a further fall to 123 levels.
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Slight correction in NZD but rally to stay because of huge carry trade with nzd rates at 7.75%, the highest afer Iceland in AAA rated economies, and JPY at 0.5%. The NZD has appreciated 27% against JPY this year, and has been one of the best performing currencies.
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Norwegian Krone to Extend Gains on Outlook for Rates, Says RBS
By Lukanyo Mnyanda
May 22 (Bloomberg) -- Norway's krone may extend gains versus the euro on speculation quickening inflation will force the central bank to quicken the pace of interest-rate increases, according to strategists at Royal Bank of Scotland Plc.
The krone, which reached a two-week high today, will benefit as the economy heads for a fourth year of ``booming growth'' and rising oil prices stoke demand for Norway's assets, strategists Mikael Nilsson and Paul Robson wrote in a note to clients.
Norway's currency, the fifth-best performer against the euro and the dollar this year, may rise a further 5.7 percent to trade at 7.7 per euro by the end of 2008, Nilsson said in a telephone today. It traded at 8.135 at 4:28 p.m. in Oslo.
``Norges Bank will need to hike rates more than is currently priced in,'' Nilsson said in the interview from his London office. ``There's more upside for the krone.''
Norway's economy has benefited as high oil and gas prices spurred oil producers such as Statoil ASA and Norsk Hydro ASA, Norway's largest companies, to boost investment. The economy may receive a further boost from government plans announced May 15 to raise spending.
The central bank said March 15 it plans to lift the deposit rate to 5 percent by year-end, and 5.25 percent by early 2008. The bank may be ``stuck behind the curve'' and may have to lift rates at a faster pace, which will enhance the appeal to foreigners of holding assets denominated in krone, the RBS strategists wrote.
``Higher rates will move the krone from a medium to a high yielder,'' Nilsson and Robson wrote. That ``will be supportive given the market continues to devour yield.''
The gap in yield, or spread, between the Norwegian 10-year bond and the similar-maturity German bunds was recently at 56 basis points. The gap will probably widen further, making Norwegian assets more attractive for investors searching for high yielding assets.
The yield on Norway 4.5 percent bond due May 2017 has risen 11 basis points in the past month. The yield, which moves inversely to the price, is set to rise for a third month. Quickening inflation and higher interest rates erode the fixed returns offered by bonds.
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