Morgan Stanley is breaking from the pack, becoming the first forecaster to predict Australia’s dollar will regain parity with its U.S. counterpart.
Demand from Japanese investors for the world’s highest-yielding top-rated debt will help push the Aussie to $1 this year for the first time since May 2013, Morgan Stanley estimates, extending the 5.3 percent advance that has made it 2014’s second-best performer among Group of 10 currencies. The median of 51 estimates in a Bloomberg strategist survey still calls for a 5 percent drop to 89 U.S. cents by year-end.
“The tide has turned for Aussie now that the Japanese have come back to the market,” Geoffrey Kendrick, Morgan Stanley’s head of Asian currency and interest-rate strategy in Hong Kong, said by phone on June 10. “Their switch back into Aussie bonds signals a turn in global long-term investor sentiment. More will follow.”
Morgan Stanley regards Japanese investors, the biggest holders of Australia’s long-term debt after U.S. and U.K. funds last year, as a bellwether for the Aussie. Drawn by the Reserve Bank of Australia’s decision to stop lowering interest rates, Japan’s money managers have been net buyers every month this year through April, purchasing a total of 356.4 billion yen ($3.5 billion) of the country’s sovereign debt.
“Compared with other developed nations, there’s still yield to be had in Australia,” Shinji Kunibe, the head of foreign-bond management at Daiwa SB Investments Ltd. in Tokyo, said by phone on June 10. “Japanese tend to see any yen strength as an opportunity to buy Australian assets.”
At 3.82 percent for 10 years, Australia’s debt has the highest yield of bonds holding top credit grades from the three main rating companies. That’s 1.22 percentage points more than the next-highest yield, Norway’s, and 2.43 more than German bunds. (GACGB10) The extra returns on offer helped push foreign holdings of Australian government debt to an all-time high of A$226 billion ($212 billion) in the first quarter.
Morgan Stanley’s view on Australia’s currency carries weight. A year ago, the U.S. investment bank had the most bearish call in a Bloomberg survey of more than 50 strategists, predicting a drop to 88 cents by the end of 2013, compared with a median estimate of 97. The Aussie ended the year at 89.17.
Australia’s dollar started tumbling in April 2013 as a slump in commodities prices hurt the economy. It has been appreciating since reaching a 3 1/2-year low of 86.60 U.S. cents on Jan. 24, and touched 94.14 today, its highest level in two months. The Aussie traded at 94.23 as of 9:52 a.m. in New York, after rising every day this week.
The rally saw the RBA complain last month that the currency was high by historical standards, even as its shift to a neutral interest-rate policy was one of the main reasons for the Aussie’s gains.
With the economy improving, the central bank signaled in February an end to two years of rate cuts that brought the benchmark to a record 2.5 percent. A Credit Suisse Group AG swaps index has started to indicate a small boost to borrowing costs over the next 12 months, after signaling no increase as recently as last week.
“A spike in Aussie approaching parity cannot be ruled out,” Todd Elmer, a Singapore-based strategist at Citigroup Inc., the world’s largest currency trader, said by phone on June 10. “There’s a greater risk we’ll see rate hikes sooner than the market is pricing in, and that’s supported by stronger economic data.”
Citigroup sees the Aussie rising to 95 cents this year.
The prospect of a downturn in China, Australia’s biggest export market, remains a threat to the Aussie, according to Barclays Plc, which predicts a decline to 87 cents by year-end.
China’s economy grew 7.4 percent in the first quarter, matching the slowest pace since 2009, while Australia’s largest export, iron ore, fell below $100 per metric ton last month for the first time since 2012.
“Our view on the Australian dollar is bearish primarily because of what we’re seeing in China, and the weakness we’re seeing in commodity prices as a result of that,” Hamish Pepper, a Singapore-based strategist at Barclays, said by phone on June 10. “Aussie at parity this year doesn’t look likely.”
Morgan Stanley’s Kendrick said he’s “very comfortable” with his forecast for the Aussie to match the greenback’s value.
“The probability of hitting parity this year is more than 50 percent, which is why I’m going for it,” Kendrick said. “If the RBA hiked rates this year -- or even early next year -- then my parity call would probably look too tame.”