HSBC's planned leveraged notes tied to two currencies vs. euro should ease euro bears' demand

By Emma Trincal

New York, May 19 - HSBC USA Inc.'s upcoming notes linked to two currencies relative to the euro are likely to be welcomed by investors amid a scarcity of currency-linked notes supply and, more particularly, notes betting against the euro despite demand for this trade, sources said.

HSBC plans to price 0% return enhanced notes due May 26, 2011 linked to a basket including equal weights of the Mexican peso and Canadian dollar relative to the euro, according to an FWP filing with the Securities and Exchange Commission.

The payout at maturity will be par plus at least 2.35 times any appreciation of the basket relative to the euro, subject to a maximum return of at least 23.5%. Investors will be exposed to any basket depreciation relative to the euro.

The exact upside participation rate and maximum return will be set at pricing.

Short euro

"Anything long against the euro is good right now," said Win Thin, senior currency strategist at Brown Brothers Harriman & Co., who added that the euro looks to be on track for a "multiyear bear market."

Twin deal

The announced deal, to be distributed by JPMorgan Chase Bank, NA and J.P. Morgan Securities Inc., follows an almost identical one that used the same distribution channel but was priced by Deutsche Bank AG, London Branch in a $6.7 million offering.

The Deutsche Bank notes due June 2, 2011 are linked to the same basket against the euro but differed from HSBC's upcoming transaction in two minor ways: The leverage factor was 2.27 times instead of 2.35, and the 22.7% cap was slightly lower.

Neither deal offered any buffer.

"If the basket return is negative, you may lose up to 100% of your investment," the HSBC FWP filing said.

Emerging markets slump

"I'm not necessarily very bullish on the Mexican peso. But it will come back eventually like the rest of emerging markets," said Thin.

"I'd rather be long the Mexican peso and Canadian dollar and short the euro as well. It's a very intuitive trade," a sellsider said.

Expensive bets

This sellsider noted that options on currencies, especially on the euro, are costly because a growing number of investors have turned bearish on the eurozone currency after the recent intensification of the Greek debt crisis.

Only three deals incorporating bearish bets on the euro have priced so far this month, according to data compiled by Prospect News. One was the $6.7 million deal previously mentioned.

The two others came to market from Bank of America Corp. and Deutsche Bank. They used the Brazilian real against the euro.

Bank of America priced $38.23 million of 0% Currency Market Index Target-Term Securities due May 30, 2012 based on the exchange rate of the Brazilian real relative to the euro.

Deutsche Bank priced $10.05 million of 0% performance securities due May 14, 2012 also linked to the Brazilian real relative to the euro.

Commodity alternative

"For a while, the intuitive trade was to be short the dollar, but now people are short the euro. Problem is that some people hate the dollar. I do, and I'm not alone because many think that what's happening in Europe is not far away from what's happening in the U.S.," the sellsider said.

"The best trade would be to be long commodities and short the dollar or the euro," he added.

"But commodities are expensive. So the Canadian dollar and the Mexican peso make for a cheaper alternative," he said.

Regarding the 23.5% cap on the one-year notes, Win said, "Anyone should be happy with a 23% return in this market. Remember the saying: Don't be greedy."

The notes are expected to price May 21 and settle May 26.

J.P. Morgan Securities Inc. is the agent.

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