Tuesday, July 10, 2007

Kiwi Intervention

From Reuters Bonds:

RBNZ battles Japan FX day-traders post-intervention

TOKYO, June 12 (Reuters) - New Zealand's central bank faces a tough opponent after having intervened in currency markets on Monday to weaken the high-flying New Zealand dollar: Japanese FX traders eager to buy the high-yielding "kiwi" currency.

Japanese day traders and other individual traders nearly doubled their bets on a stronger New Zealand dollar on Monday after the selling by the Reserve Bank of New Zealand in its first intervention since the NZ dollar was allowed to trade freely in 1985.

Data from the Tokyo Financial Exchange showed that Japanese margin traders -- who use borrowed funds to boost the size of their bets -- raised their positions in the New Zealand dollar to $347 million from $180 million the previous day.

While the positions at the TFX are not large relative to the overall market, analysts said they typify the trading style of Japanese investors: selling higher-yielding foreign currencies when they strike peaks against the yen, but then buying when they tumble.

"Japanese retail investors were not discouraged by the authority's action," said Masafumi Yamamoto, currency strategist at Nikko Citigroup in Tokyo. "It is likely that Japanese retail investors will continue to increase their foreign currency exposure, especially that of high yielding currencies like NZD."

The NZ dollar rose nearly half a percent to 91.65 yen on Tuesday, up from Monday's low near 90.80 yen but off the 17-year high near 93.00 yen struck late last week. The kiwi has steadily risen over the past seven years against the yen, more than doubling in value from its lows in late 2000.

FX margin trading has boomed in the past few years as individuals look for ways to make money in higher-yielding currencies.

The Financial Futures Association of Japan, which tracks FX margin activity, estimates that trading volume surged to 109.2 trillion yen ($898.2 billion) in the January-March quarter, up 40 percent from the previous quarter.

Japanese investors have flocked to online FX trading and mutual funds featuring foreign assets for better returns, with short-term domestic rates still just 0.5 percent compared with New Zealand's 8 percent or 5.25 percent in the United States.

Such Japanese demand for foreign currencies and assets has helped to spur the carry trade, in which the low-yielding currency is used by investors as a cheap source of funds to buy higher-yielding assts.

New Zealand authorities have previously tried to tackle the Japanese hunger for their currency, especially uridashi bonds denominated in the New Zealand dollar and sold directly to Japanese households.

Officials from New Zealand's Treasury and central bank visited banks and securities houses in Tokyo about a year and a half ago, saying investors needed to be warned of the risks of a potential sharp fall in the NZ dollar.

But Japanese investors have been undeterred, and the New Zealand currency remains among the most popular for uridashi bonds. ($1=121.58 Yen)

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