Barclays' enhanced notes tied to bearish yen are another play on dollar rally, source says

By Emma Trincal

New York, March 4 - Barclays Bank plc's planned leveraged notes linked to the negative performance of the Japanese yen versus the dollar target primarily investors bullish on the dollar, sources said.

"This trade makes sense from the standpoint of being bullish on the dollar," said Kirk Chisholm, principal and wealth manager at NUA Advisors in Lexington, Mass. "Rather than negative on the yen, this is more about being positive on the dollar."

Barclays plans to price 0% buffered return enhanced notes due March 8, 2012 linked to the bearish performance of the Japanese yen, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus at least 1.5 times any increase in the yen/dollar exchange rate, subject to a maximum return of at least 22.5%. The exact upside leverage factor and maximum return will be set at pricing.

Investors will receive par if the exchange rate declines by 5% or less and will lose 1.0526% for every 1% that it declines beyond 5%.

The exchange rate will increase if the yen depreciates relative to the dollar and will decrease if the yen appreciates relative to the dollar.

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

Good cap

"I think the cap is good because you would have to see a move of more than 15% to lose on the upside," said Chisholm. "The dollar is likely to strengthen over the next two years, but I don't think you'll see that much of a swing. A 15% move is a large move in currencies. So I don't think the cap is an issue here."

Young rally

Since the beginning of December, the dollar has climbed by 7.5% against major currencies as measured by the U.S. Dollar index, which tracks the performance of the U.S. currency against a basket of six currencies: the euro, the yen, the British pound, the Canadian dollar, the Swiss franc and the Swedish krona.

The recent dollar rally has been fueled by concerns about the sovereign debt crisis in some eurozone countries, especially in Greece but also Spain and Italy, said Chisholm.

"The dollar is going to rally even more, but it's difficult to put a timeframe on it because it's so closely tied to those events. This security is good for someone who is bullish on the dollar. The only problem here could be the term of the notes. Two years is a long time in the FX market," said Chisholm.

Last month Barclays priced $6.54 million of leveraged buffered notes similar in structure and view to the recently announced deal and also sold via the JPMorgan network.

Morgan Stanley, also tapping into the JPMorgan sales network, priced similar bearish notes on the yen recently.

More dollar bulls

The trend of structuring bullish bets on the dollar is recent, according to data compiled by Prospect News. It began in December as the sovereign debt crisis worsened in Greece and as investors flocked to the dollar for its relative safety.

The stronger dollar led to bigger deals in January and February as investors sought notes that could express their bullish views on the dollar using a variety of different currencies.

An example was Eksportfinans ASA, which last month priced $95.97 million of 0% currency-linked one-year notes linked to the bullish performance of the dollar relative to the euro via Goldman, Sachs & Co.

Dollar fundamentals

"There is an intrinsic bullish argument to be made about the dollar," said Meg Browne, senior currency strategist at Brown Brothers Harriman & Co.

Browne said that her firm has been betting on a strengthening of the dollar for a long time and well before the Greek crisis.

"The U.S. economy is performing better than a number of different countries. The [Federal Reserve Board] is removing some of its most extreme accommodative policies and has laid out an exit strategy," Browne said. But Browne also noted that there are "plenty of reasons" to be bearish on the Japanese economy and its currency.

"The yen will probably weaken against the dollar, at least within the next 12 months," she said.

"Japan is one of the last major countries to be able to hike its rates. They can't tighten anytime soon because they are worrying so much about deflation," she said.

The notes are expected to price Friday and settle Wednesday.

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