The more than $70 billion a month Japan is spending to end deflation is feeding demand for the higher-yielding Aussie, threatening the Reserve Bank of Australia’s efforts to stimulate its economy.
Japanese investors bought 91.3 billion yen ($922 million) more Australian debt than they sold in July, the first overall additions since October and the largest in a year, official data show. The Australian dollar is poised for its biggest monthly surge versus the yen since January, outpacing all but the kiwi among 10 major developed currencies.
RBA Governor Glenn Stevens said this month a reduction of record-low interest rates remains possible and that a weaker currency would help an economy set for its slowest expansion in four years. Sustained easing by the Bank of Japan and the Federal Reserve is fueling a stronger Aussie that may force the RBA to add to 2.25 percentage points of cuts over two years, JPMorgan Chase & Co estimates.
“Investors are coming back to Australia,” said Hideo Shimomura, the chief fund investor who helps oversee about $60.3 billion at Mitsubishi UFJ Asset Management Co. The huge outflows as Japanese investors sold Australian bonds from mid-2012 have “clearly stopped,” he said.
Shimomura expects bond yields to fall with the RBA in “easing mode” as it needs a weaker currency to boost the economy. The benchmark 10-year yield will more than reverse this year’s 59 basis point advance to 3.86 percent and drop to 3 percent by the end of the year, he said.
Buying by Japanese investors in July followed 1.6 trillion yen worth of sales between November and June, according to data from the Ministry of Finance in Tokyo. They added 71.7 billion yen of long-term sovereign debt in a second month of buying.
Purchases of offshore bonds have continued since July, with the Asian nation’s fund managers buying a net 1.4 trillion yen of foreign debt from the week to Aug. 2 till Sept. 13, according to separate data, which isn’t broken down by country.
The Aussie dollar has rebounded more than 5 percent after tumbling by the most since the 2008 financial crisis to reach a three-year low of 88.48 U.S. cents on Aug. 5. The world’s fifth-most traded currency bought 93.55 cents at 12:30 p.m. in Sydney, and is poised for its strongest monthly advance in more than a year. The Aussie bought 92.25 yen.
“The RBA has been pretty honest about saying they want the currency lower and I don’t really think the Aussie at 94-95 cents is part of that plan,” said Sally Auld, a interest rate strategist at JPMorgan in Sydney. “They have to cut rates if they want the currency lower, because you need to take the carry away,” she said, referring to the yield premium that Australia offers.
The central bank will probably cut rates in November, according to JPMorgan. The Aussie is being supported by improving Chinese data, Japanese fund flows and the Fed’s decision to delay tapering its stimulus, Auld said.
In the RBA’s June meeting minutes, the central bank expressed concern at the prospect Japanese investors would shift into foreign bonds, even though it said there was no evidence of such moves at the time.
“Nonetheless, if it occurred, such a shift had the potential to affect Australian foreign exchange and debt markets,” policy makers said in the minutes released June 18.
Japanese fund managers had 18 trillion yen invested in Australian-dollar debt and equity markets last year, with almost 90 percent of that in fixed income, according to BOJ data. That’s equal to about 12 percent of Australia’s gross domestic product. UBS AG estimates their holdings are bigger than the combined investments of global reserve managers.
The buildup of central bank reserve holdings in the currency helped the Aussie trade above $1 for a record 10 months till May, stunting the effect on the exchange rate of the RBA’s reductions in borrowing costs.
Australia lost 42,400 jobs in manufacturing in the 12 months through August as the sustained strength of the local dollar reduced the competitiveness of local producers, government data released last week showed. The mining industry that has powered the economy over the past decade shed 2,800 positions in the period as an investment boom wanes.
Telstra Corp. expects to cut 1,100 jobs at its operations unit, or about 6 percent of that part of the business’ workforce, by June 2014, Australia’s biggest phone company said yesterday in a statement.
The RBA kept benchmark rates unchanged at a record low 2.5 percent on Sept. 3 and reiterated that a lower currency would help rebalance economic growth.
Board “members agreed the bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them,” the RBA said in minutes of this month’s meeting.
There’s a 43 percent chance Stevens will reduce borrowing costs again this year, according to swaps data compiled by Bloomberg.
Interest from Japanese investors will accelerate once the RBA is finished with its easing cycle, said Martin Whetton, an interest-rate strategist at Nomura Holdings Inc. in Sydney.
“There has been a pickup in interest, but it’s not anywhere near the scale that we’ve seen before,” he said. Japanese money managers have been “very supportive of the spread-product deals in recent weeks, and a lot of the issuance that has come has gone to them.”
That demand helped drive more than A$3 billion ($2.8 billion) of Australian-dollar bond offerings this month by foreign lenders, including sovereign-backed borrowers, data compiled by Bloomberg show. Sales have exceeded A$8 billion this quarter.
The Aussie’s rise above 90 yen may be giving some investors the confidence to return to the nation’s bonds, said Hideya Kubo, a senior money manager in Tokyo at Diam Co., which oversees the equivalent of about $120 billion. Kubo expects the Aussie to trade in a range between 90 and 95 yen in the near term and said a majority of his clients are retail investors.
“No one wanted to catch a falling knife,” he said. “We have less outflow recently, so the sentiment seems to be improving. However, our clients are still cautious and reluctant to put new money on the Australian dollar market.”