Japan's Investors May Buy Australian, N.Z. Dollars, RBS Says

By Ron Harui

July 15 (Bloomberg) -- Japanese individual investors may keep buying the Australian and New Zealand dollars because of the South Pacific nations' interest-rate advantage over Japan, according to Royal Bank of Scotland Group Plc.

Housewives, pensioners, and businessmen boosted purchases of New Zealand's dollar, known as the kiwi, to a record last week as gains in Japan's currency provided them with an opportunity to buy higher-yielding assets at cheaper levels, according to data from the Tokyo Financial Exchange. The yen sales came even as concerns increased that New Zealand's economy may have slipped into a recession.

``Mrs. Watanabe likes kiwi,'' said Masafumi Yamamoto, head of foreign-exchange strategy in Tokyo at Royal Bank of Scotland, the fourth-largest currency trader, in a research note dated yesterday. ``Japanese retail investors don't care yet about the economic slowdown becoming evident in Australia and New Zealand and are likely to continue buying the high-yielding currencies as long as the yield gap remains.''

Investors increased net long positions on New Zealand's currency against the yen to an all-time high of 150,829 contracts on July 8 and on Australia's dollar to a record 79,920 on July 1, according to Tokyo Financial Exchange data. A long position is a bet on an asset price's gain.

The New Zealand dollar traded at 81.09 yen as of 3 p.m. in Tokyo from 81.21 yen late in Asia yesterday. The Australian dollar bought 103.18 yen, compared with 103.31 yen.

The Australian and New Zealand dollars are the best and third-best performers respectively, among the 16 most-active currencies versus the yen the past five days.

Rate Difference

The Bank of Japan kept its benchmark interest rate at 0.5 percent today while cutting its economic growth forecast. Benchmark interest rates are 8.25 percent in New Zealand and 7.25 percent in Australia, making the currencies of the nations favorites for so-called carry trades.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency market moves erase those profits.

`Significant Headwind'

``The behavior of such investors, given the size of their asset holdings, is a potential significant headwind against Australian and New Zealand dollar weakness,'' said Yamamoto, who confirmed the details of the report.

So-called margin trading of currencies in Japan using borrowed funds rose 86 percent in the first quarter to a record 213 trillion yen ($2 billion), figures from the Financial Futures Association of Japan showed in May.

Japanese households have 1,490 trillion yen in financial assets, according to the Bank of Japan.

Australia's dollar, know as the Aussie, has climbed 10.6 percent and New Zealand's dollar advanced 2.3 percent the past three months on prospects that both countries will maintain their interest-rate advantage over Japan.

``Japanese households believe large yield gaps versus Japan will be maintained for the foreseeable future, despite monetary policy easing in Australia and New Zealand that we think is likely next year,'' Yamamoto said. ``They remain buyers on dips of Aussie-yen and kiwi-yen.''

Australian Finance Minister Lindsay Tanner said in a speech today at the Royal Melbourne Hospital that the economy faces ``uncertain times' because of the global credit slump, high inflation and record oil prices.

Heading for Recession

New Zealand's economy contracted 0.3 percent in the first quarter from the previous three months, a government report showed on June 27. Eight of 13 economists surveyed by Bloomberg say it also shrank in the second quarter, putting the economy in its first recession since 1998.

Traders are betting the Reserve Bank of Australia will cut its benchmark rate by 2 basis points, or 0.02 percentage point, in the next 12 months, according to a Credit Suisse Group index based on interest rate swaps. A similar index shows the Reserve Bank of New Zealand will lower its benchmark rate by 136 basis points, or 1.36 percentage points, in the next year.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net