* 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.