* G7 intervention seen boosting yen carry trades
* Aussie and kiwi dollars to be supported by flows in April
* BOJ seen last in normalising monetary policy
By Anirban Nag
LONDON, March 23 The Group of Seven intervention to drive down the yen has created conditions ideal for the Japanese yen to become the preferred funding currency, and this could boost growth-linked currencies like the Australian dollar.
In their first joint intervention since 2000, G-7 rich countries sold the yen JPY= on Friday after it spiked to record highs of 76.25 per dollar and threatened to deal a blow to the export-reliant Japanese economy that was just picking up from a lull when the earthquake and tsunami struck.
The Bank of Japan is not expected to drain yen that enter the market through intervention. [ID:nTKZ006879] In addition, the BOJ eased its ultra-loose policy even further last week, taking a step further away from rate normalisation.
The flow of yen into the financial system, ultra-low Japanese money market rates and expectations yen gains will be capped should combine to see the Japanese currency take over from the U.S. dollar as the world's preferred funding currency.
"Positive risk appetite, expectations that Japanese money market rates will remain low, and the (fact the) Bank of Japan will likely counter any repatriation flows mean conditions are supportive for yen-funded carry trades," said Hans-Guenter Redeker, chief FX strategist at BNP Paribas.
In carry trades, investors borrow in a lower yielding currency to invest in others which return higher yields to investors. In the past two years as the global economy recovered from the financial crisis, the bulk of carry trades used the dollar as the funding currency.
Yen-funded carry trades were very common before the global financial crisis struck in mid-2008, having picked up after the BOJ unilaterally intervened in 2004 to drive the yen lower. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
TIMELINE-Japan intervenes in FX market [ID:nTOE673024]
G7 intervention link.reuters.com/sub68r
Reuters Insider show on G7 intervention [ID:nRTV202021] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Since Friday's intervention, the Australian dollar AUDJPY=R has gained 5.9 percent against the yen to a peak of 81.90 yen from 77.34 yen. The return of Japanese investors could push the Aussie to revisit its highs of $1.0257.
Similarly, the New Zealand dollar has advanced to 60.04 yen from a near two-year low of 54.98 struck on Thursday.
"The action in the kiwi dollar at a time not much is going in favour of the New Zealand economy shows that there is an opportunity out there and yen-funded carry trades could become attractive," said Steve Barrow, head of G-10 currency research at Standard Bank.
Australia's benchmark interest rate is 4.75 percent, while New Zealand's cash rate is at 2.5 percent, amongst the highest in the rich world where the Federal Reserve, the Bank of England and the Bank of Japan all have rates near zero.
In contrast to the Australian and New Zealand dollars, the U.S. dollar has struggled to hold on to its gains against the yen JPY= made after the intervention. Still, most expect the G7 to sell more yen and see 80.00 yen as a line in the sand.
Traders say ahead of Japan's March 31 fiscal year end there has also been a marked rise in Japanese commercial and retail interest to buy yen. Once that is over, April will bring with it a surge in Japanese investor sales of the yen, with upside risk in the yen all but absent.
"Investors are confident that the G7 won't let the yen go below 80 versus the dollar again," said David Cohen, director of Asian forecasting at Action Economics, Singapore.
"That makes the carry trade appealing and will restore investors' interest." He said Japanese retail investors who were pulling back last week would return to buy high-yielding currencies in the coming months.
Indeed, data from Tokyo Financial Exchange show Japanese retail margin traders have been trimming their long positions in Aussie/yen. On Monday, net longs fell by 20,250 lots, compared with a huge 88,429 lots on Thursday.
Overall, Japanese margin traders have cut their foreign currency buying to a two-week low. Their buying of seven major currencies against the yen fell to 398 billion yen ($4.91 billion) on Tuesday, down more than 300 billion yen from a record net long of 732 billion yen last Wednesday.
Analysts say with the Federal Reserve likely to end quantitative easing in June, the European Central Bank likely to raise interest rates next month and the Bank of England considering rate hikes in the second quarter, Japan will be exceptional in holding rates near zero.
"With the Fed likely to move ahead of the BOJ, carry trades which were being funded in the dollar will move to the yen," said Barrow at Standard Bank.