Mighty Aussie Lets Stevens Stem Prices, Avoid Currency Controls

At a time when nations from Japan to Brazil are struggling to keep currency gains from damaging their economies, Reserve Bank of Australia Governor Glenn Stevens is welcoming a stronger exchange rate.

Australia’s dollar has advanced 19 percent since the end of June, the most of the 16 major currencies tracked by Bloomberg data, reaching parity with the U.S. dollar last month for the first time since July 1982. The rally may help curb inflation as sales of iron ore and coal to China bring in fewer local dollars. When Stevens surprised investors by boosting interest rates on Nov. 2, he said in a statement that the rising currency “will assist, at the margin, in containing pressure on inflation.”

Stevens is allowing gains while Japan sold yen for the first time since 2004, and Brazil, South Korea and Taiwan raise barriers to foreign investors. World leaders from countries including Japan, Brazil and China have said the U.S. is debasing its currency through the Federal Reserve’s plan to print dollars so it can buy $600 billion of Treasuries.

“The Australian dollar is among what we’re calling the world’s new safe havens,” said Jonathan Lewis, founding principal of New York-based Samson Capital Advisors LLC, which manages $6.9 billion and specializes in bonds and currencies. The so-called Aussie “floats more freely than others,” he said. “Even free-float currencies must have an asterisk next to their names because of central bank interventions.”

Buying Bonds

After meetings in Seoul last week, leaders of the Group of 20 nations agreed to seek gradual changes in currency values, providing some countries with cover to enact capital controls to limit exchange-rate swings.

Prospects for the Aussie are prompting some of the world’s biggest bond investors to pile into the nation’s debt, even though Stevens signaled more rate increases may come.

Lewis has twice the percentage of Australian dollars in client accounts than what’s contained in the benchmark index Samson uses to gauge performance. Kokusai Global Sovereign Open, Asia’s biggest bond fund, boosted its investment in Australia to a record 15 percent of assets this year.

“The Australian economy is healthy,” said Masataka Horii, one of four managers for Kokusai’s $37.5 billion Global Sovereign fund in Tokyo. “The Reserve Bank of Australia will continue to hike its policy rate, and the currency will appreciate.”

‘Aggressive’ Bank

Samsung Investment Trust Management Co., South Korea’s largest private fixed-income investor, is starting a fund next year to invest in Australian debt.

“Australia has one of the most aggressive central banks in the world,” said Sungjin Park, who oversees the equivalent of $55.9 billion as head of fixed income for Samsung in Seoul. “A lot of fund managers in Asia, including China and Japan, think Australian bonds are more attractive” than other sovereign debt in the region, he said.

The government’s Nov. 10 auction of debt maturing in July 2022 attracted bids for 4.55 times the amount of securities available, the most since the nation expanded its borrowing program in 2009.

The Aussie slipped 0.1 percent today to 98.36 U.S. cents as of 8:58 a.m. in London, rising from this year’s low of 80.67 cents in May. It climbed as high as $1.0183 on Nov. 5.

Outpacing Forecasts

Analysts failed to predict the gains. The Aussie finished the third quarter at 96.71 U.S. cents, while the median estimate of strategists and economists surveyed by Bloomberg was for 88. They are now catching up with the rally, raising their mid-2011 estimate to 99 U.S. cents from 88 two month ago.

The Australian dollar’s advance has made it the world’s most expensive currency based on purchasing power parity, a measure of the cost of goods relative to other countries. The gauge shows the Aussie is trading at a 30 percent premium, according to data compiled by Bloomberg.

“It’s very overvalued and it’s unlikely to remain that way for a substantial period,” said Lee Hardman, a foreign-exchange strategist in London at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest publicly traded bank.

Australia’s jobless rate of 5.4 percent compares with 9.6 percent in the U.S. and 10.1 percent in the euro zone. The International Monetary Fund predicts Australia’s economy will expand 3.5 percent next year from 3 percent in 2010, compared with 2.3 percent in the U.S. and 1.5 percent in Europe.

China Growth

The figure will be 9.6 percent for China, the IMF projects, stoking demand for resources from Australia, the world’s biggest exporter of iron ore and coal. Chinese imports of iron averaged 51.5 million tons a month this year and last, compared with 37 million tons monthly in 2008.

Shipments of commodities to China are boosting employment. BG Group Plc, the U.K.’s third-largest oil and gas producer, said Oct. 31 it will build a $15 billion liquefied natural gas venture in Queensland. The project will likely create 5,000 jobs, the Reading, U.K.-based company said.

Australian employers added 29,700 workers in October from the previous month, the statistics bureau reported on Nov. 11. A Bloomberg News survey of economists projected 20,000.

The hiring threatens to boost inflation, which the central bank aims to keep in a range of 2 percent to 3 percent. Consumer prices rose 2.8 percent in the third quarter from a year earlier, versus 3.1 percent in the April-to-June period, the government said Oct. 27.

Raising Rates

The Reserve Bank of Australia, known as the RBA, has lifted its target for overnight lending between banks seven times since October 2009. The latest move was a quarter-point increase to 4.75 percent on Nov. 2. In his statement that day, Stevens highlighted the prospect for growth by saying he expected “stronger private spending over the next couple of years.”

Benchmark rates in the U.S. and Japan are both near zero. Central banks in both nations are also buying government bonds, a strategy known as quantitative easing that pumps money into the economy. Japan sold yen on Sept. 15 to stem the currency’s rally to a 15-year high.

Japanese Prime Minister Naoto Kan said earlier this month the U.S. was pursuing a “weak-dollar policy,” and Chinese central bank adviser Xia Bin said that U.S. quantitative easing amounts to “uncontrolled” money printing. Brazil’s President- Elect Dilma Rousseff said last week other countries are carrying the cost of the U.S. debasing its currency.

Stevens’ tolerance of a stronger local dollar contrasts with officials from other nations who are concerned gains will curb demand for exports and lead investors seeking higher yields to flood their markets with money.

Currency Controls

Brazil President Luiz Inacio Lula da Silva tripled a tax on foreigners’ fixed-income purchases last month to 6 percent. South Korea may revive a 14 percent tax on bonds held by international investors as early as January, ruling party lawmaker Kim Song Sik said in an interview in Seoul on Nov. 9.

Taiwan said on Nov. 9 it would limit foreign investment in government bonds and money-market products to a maximum of 30 percent of the value of an overseas fund’s portfolio.

Currency gains will help Stevens cool growth, said Ken Leech, head of the global investment strategy committee for Western Asset Management Co., Legg Mason Inc.’s bond unit.

“We don’t think they’re going to intervene,” Leech, who helps oversee $482.2 billion for Pasadena, California-based Western Asset, said at a Nov. 2 seminar in Singapore.

The Australian economy is attractive enough to draw Franklin Templeton Investments, making the San Mateo, California, company the second-largest holder of the nation’s debt behind Kokusai, according to data compiled by Bloomberg.

“Fundamentals remain better in Australia than the U.S., and despite the recent appreciation should allow the currency to remain strong,” said David Zahn, who helps oversee Franklin’s $664.3 billion in assets as a London-based senior money manager in the fixed-income group. “It is responsible to hike rates to keep the economy from overheating and keep inflation in check,” he said in an e-mail. “The rise in the currency does some of this for the RBA.”

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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