* 03 Aug 07: 17:46(LDN) - FX NOW! EUR/ISK, JPY/ISK Flows- ISK decline of over 3% today, highlights risk in carry trade
Iceland's currency has joined in with the rest of the market and given in to the broader markets reduced interest in exotic instruments, which includes a large flow of Glacier bonds that offered yield hungry investors returns that were hard to match. Supporting these purchases and contributing to the heavy demand were leveraged players that felt the easy funding in JPY at rates under 1% made an investment in Icelandic debt where official rates are 13.30% too good to be true. It was, while JPY added to returns with its steady and apparently officially supported decline, almost too easy. Over the last two weeks, the "carry trade", where ISK is a prime example of a high yielder, has suffered like the rest of the high yield market and more. Lower liquidity and the relatively specialized nature of the market has contributed to the limited liquidity when it is most needed and today's rally in ISK/JPY from 0.5230 to 0.5410 highlights the risk that has been ignored, but is inherent in the trade. EUR/ISK has also climbed, with lows of 85.40 to highs of 88.20. Capitulation, rebalancing bond positions to stay with market indices and general flight goes a long way to explaining the 3.20% and higher decline in ISK while the "carry trade" suffers even more. M.B.
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