Agents ready, price notes, certificates of deposit taking a bearish view on the dollar

By Emma Trincal

New York, March 9 - Several deals expressing bearish views on the dollar have recently been priced or announced with various structures and underlying asset classes.

Barclays Bank plc for instance priced $5.23 million of 0% return enhanced notes due June 7, 2012 linked to the performance of an equally weighted basket of three currencies relative to the dollar, according to a 424B2 filing with the Securities and Exchange Commission.

JPMorgan Chase Bank, NA and J.P. Morgan Securities LLC are the agents.

The underlying currencies are the Brazilian real, the Indian rupee and the Indonesian rupiah.

The payout at maturity will be par plus 2.67 times any basket gain. Investors will be exposed to any basket decline, subject to a minimum payout of 95% of par.

"I like the structure. The most you can lose is 5%. It's a huge downside protection. When you combine that with a fair amount of leverage on the upside that is not capped, it sounds very attractive," said Clemens Kownatzki, founder of FX Investment Strategies LLC, an advisory firm specializing in the global financial markets.

CD format

Agents have also planned bearish bets on the dollar wrapped in a certificate of deposit format.

"People are very bearish on the dollar right now. There's this massive spending and the inflationary pressures that are going to be felt over the next five years," a New York sellsider said.

HSBC Bank USA, NA and JPMorgan Chase Bank, NA are each planning CDs linked to the BRIC currencies in more bearish bets against the dollar.

HSBC plans to price 0% income and performance CDs due March 30, 2016 linked to an equally weighted basket that includes the real, the Russian ruble, the rupee and the Chinese renminbi, according to a term sheet.

The annually paid coupon will be set at pricing and will be in the range of 0.75% to 1%.

The payout at maturity will be par plus 100% of any gain in the basket versus the dollar. Investors will receive at least par.

JPMorgan plans to price CDs due March 31, 2015 linked to an equally weighted basket of currencies against the dollar, according to a term sheet.

The basket contains the real, the ruble, the rupee and the renminbi.

The payout at maturity will be par plus at least 100% of any gain in the basket. Investors will receive at least par.

"There is a bearish sentiment on the dollar," said Kownatzki. "Look at our current account deficit, look at the Federal debt, and look at the cost of capital for the U.S. government that's at an all-time low.

"The euro is up 5% against the dollar year to date. Considering that several European countries are on the verge of defaulting on their debt, you can conclude that the dollar is weak, not that the euro is strong.

"And if you compare the dollar with the currencies of Australia, Canada, Brazil and Singapore, countries that have strong economies, you see that demand for those foreign currencies is fairly strong.

"Some of those countries, especially Brazil, are exporting commodities. So if you're bullish on commodities, it's a good play as well."

FX-denominated notes

Another way structurers are allowing investors to express bearish views on the dollar is through notes that are denominated in a foreign currency.

Two deals following this model recently priced.

JPMorgan Chase & Co. priced R$8.2 million of 0% real-denominated knock-out notes due March 8, 2012 linked to the Bovespa index. The notes are denominated in reais, but all payments will be made in dollars.

A knock-out event occurs if the index closes above 121% of its initial level on any day during the life of the notes.

If a knock-out event does not occur, the payout at maturity will be par plus the index return, subject to a floor of par. Otherwise, investors will receive par plus 5%.

The size of this offering translated into $4.98 million.

Morgan Stanley priced R$1 million (or $604,000) of real-denominated senior fixed-rate step-up securities due March 25, 2015, according to a 424B2 filing with the SEC.

All interest payments and the payout at maturity will be converted into dollars at the exchange rate then in effect.

The coupon is 9% in year one, 9.25% in year two, 9.75% in year three and 10% in year four. Interest is payable annually.

The payout at maturity will be par.

"These are convenient products for an investor who wants to combine a bullish bet on a foreign equity market and a bearish view on the dollar," said Kownatzki.

"If you're bullish on the foreign equity market and if your notes are denominated in the currency of this country, all gains at the end of the term are translated into dollars. It's an added bonus if the dollar declines in value."

Kownatzki noted that for more sophisticated investors "many ways" existed to reproduce this trade.

"You can trade currency options as futures, forwards or as [over-the-counter] derivatives. You can also have an option on a foreign index. It depends on the investor," he said.

Dollar agnostics

While those bearish bets on the greenback are gaining in popularity, not everyone shares this view.

"I am not a big bear on the dollar," said Thomas Livingston, director of structured products at Halliday Financial Group.

"Many think that emerging market currencies might advance against the dollar. We don't have that view. I'm kind of agnostic toward that.

"Right now, the dollar happens to be the tallest midget.

"I guess I have a blind confidence that our government will get its act together and understand that a weak dollar is not the solution."

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