Capital Account Outflow from Japan pushing the Yen lower?

Yen Trades at 4 1/2-Year Low Against Dollar on Yield Disparity
By Agnes Lovasz and David McIntyre

June 14 (Bloomberg) -- The yen traded at the weakest against the dollar since December 2002 as investors were enticed by the yield advantage on U.S. Treasuries over Japanese debt.

The yen has dropped 3 percent this year as traders reduced bets on lower U.S. interest rates, causing the 10-year yield spread with Japan to widen to a four-year high. Traders also expect the Bank of Japan to keep its key interest rate at the lowest among major economies tomorrow. Low Japanese rates have encouraged purchases of higher-yielding assets financed by borrowing in yen, the so-called carry trade.

``We're highlighting outflows by retail investors as the primary driver for yen weakness,'' said Adam Cole, senior currency strategist at Royal Bank of Canada Europe Ltd. in London. ``And the market still has appetite for borrowing yen and buying high-yielding assets. The yen will keep going down.''

The yen fell to a low of 122.97 per dollar, the weakest since Dec. 12, 2002, before trading at 122.89 at 9:13 a.m. in London from 122.72 late in New York yesterday. Cole expects the yen to be at 126 by year-end. It fell to 163.58 per euro, from 163.36. The euro was little changed at $1.3312, bouncing up from $1.3290 earlier.

The Japanese currency's descent may accelerate should it weaken beyond 123, where there are sell orders, said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest lender by assets.

``The yen's downward momentum is strong,'' said Kato. ``Yen- selling is likely to continue'' to 123.20 per dollar today.

Japan's currency fell to the weakest in 15 years against the Australian dollar, reaching 103.19 yen, before recovering to 103.01 as Reserve Bank of Australia Governor Glenn Stevens said in a speech today he would have ``time'' to respond to inflation pressures, adding to signs he won't raise rates any time soon.

Interest-Rate Differentials
The yen has fallen 2.7 percent versus the New Zealand dollar and 2.1 percent against Australia's this month as investors took advantage of Japan's borrowing costs to buy assets in those countries. The benchmark rate is 6.25 percent in Australia.

The Reserve Bank of New Zealand raised its key rate to 8 percent on June 7. New Zealand's dollar has rebounded 1.6 percent against the yen to 92.32, after slumping 2.2 percent from a 17- year high of 93.11 on June 11, when the central bank sold the currency to stem gains.
``Investors are focusing on interest-rate differentials,'' said Mizuho's Kato.

The difference in yield between a 10-year Japanese and U.S. note was 3.26 percentage points, near the widest since March 2005.
The BOJ will hold its target rate at 0.5 percent tomorrow, according to all 43 economists surveyed by Bloomberg. That compares to 5.25 percent in the U.S.

Barrier Options
Gains in the dollar against the yen may stall around 123, because of sell orders to protect barrier options, said Nobuaki Tani, a senior currency dealer at Resona Bank Ltd. in Tokyo.

``There seem to be a lot of offers between 122.80 and 123, some of which are to defend options,'' Tani said.

A barrier has a knock-out that renders an option worthless should it be triggered. Options give holders the right to buy or sell a currency at a set price on a fixed date. An investor who buys an option can only lose the premium paid.

The euro may be supported by speculation a report today will show inflation in the 13-nation region remained close to the European Central Bank's 2 percent ceiling for a third month.

ECB Rate Hikes
Europe's single currency yesterday rebounded from an 11-week low against the dollar after ECB President Jean-Claude Trichet said the central bank will deliver price stability, suggesting higher borrowing costs.

``We're likely to see more ECB rate hikes,'' said Lee Wai Tuck, currency strategist at Forecast Singapore Ltd. ``This will be positive for the euro,'' which may advance to $1.3380 and 164 yen today.

The euro may trim a 1.1 percent decline versus the dollar this month as consumer prices probably increased 1.9 percent in May from a year earlier, according to a Bloomberg News survey.

Interest-rate futures show traders are betting on at least one more quarter-point rate increase from 4 percent, and have increased wagers on a second one by year-end.

The implied yield on the December Euribor contract was 4.545 percent, up from 4.515 percent a week earlier. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points more than the key rate since 1999.
The Swiss franc erased gains against the euro and fell against the dollar after the central bank raised its target interest rate a quarter point to 2.5 percent today.

Against the euro, the franc traded at 1.6574, from 1.6550 shortly before the rate decision, and 1.6566 late yesterday. It was also at 1.2450 to the dollar, from 1.2446.