Big Short on Aussie Tells Loomis Time to Buy: Australia Credit
No currency has ever fallen afoul of investors as fast as the Aussie over the past two months. For Loomis Sayles & Co.’s Dan Fuss, that’s a buy signal.
Fuss, whose Loomis Sayles Bond Fund beat 97 percent of peers in the past year with a 13 percent return, said he bought Australian dollar debt of a U.S. bank to benefit from higher yields and a positive exchange-rate outlook over three years. Traders swung to a record 63,277 net positions betting on declines on June 11, from net longs of 83,971 on April 2. That’s the biggest 10-week reversal on record for major currency contracts tracked by the Commodity Futures Trading Commission.
“We bought because of the fear and the decline,” in the currency, said Boston-based Fuss. “We buy into down markets so when a market’s coming down, be it a bond market, a stock market, currencies -- preferably we get two of them together -- that’s when we buy. Our longer-term outlook for Australia is actually relatively positive.”
Loomis’ confidence in the Aussie contrasts with a market that drove it last week to the lowest level since September 2010. Fading mining investment has spurred concern that the economy can’t cope with declining demand from China, causing analysts to slash Aussie forecasts by the most among 50 currency pairs since the end of April.
Stocks are slumping even after the central bank cut borrowing costs to an all-time low. The S&P/ASX 200 Index (AS51) dropped 2 percent in June, extending May’s 5.1 percent loss that was the biggest in a year.
Bonds are also dropping following last month’s biggest slide in 1 1/2 years. Benchmark 10-year yields rose three basis points, or 0.03 percentage point today, to 3.39 percent. They surged 27 basis points last month. The extra yield over similar-maturity U.S. Treasuries narrowed to 108 basis points on June 7, the least since November 2008.
Fuss said his funds are focused on buying securities maturing in about three years in Australia and similar markets, unlike in 2008 when they bought the longest maturities amid market declines. He didn’t say which bank’s bonds he had bought.
Morgan Stanley, Bank of America Corp. and JPMorgan Chase & Co. led a surge in Australian bond sales by foreign borrowers last month. Morgan Stanley sold A$700 million of November 2018 securities, paying 4.75 percent, or 194 basis points more than government yields, data compiled by Bloomberg show.
“The pick-up in yield is substantial and the time to maturity is long enough so that we feel good about the currency over a three-year range,” he said. “We liked the underlying credit for the U.S. bank, so it was a net addition to our position in the Australian dollar.”
The Loomis Sayles Bond Fund (LSBDX)’s Aussie-denominated holdings as of April 30 included 2017 notes issued by Morgan Stanley, the state of New South Wales’ 2017 and 2018 bonds, and 2015 securities sold by the European Investment Bank, according to data collected by Bloomberg. The fund’s Australian currency exposure was approximately 3.5 percent at the end of the first quarter, the firm said in April.
The 147,248 turnaround in Aussie futures surpasses the 143,968 reversal for contracts on Japan’s yen that took place in the 10 weeks to Feb. 13, 2007, that had stood as the largest drop on record for nine major exchange-rate based futures, according to data compiled by Bloomberg from CFTC reports back to 1993. Aussie net longs had reached an all-time high 103,376 on Dec. 11.
The world’s fifth most-traded currency plunged 7.7 percent this quarter to 96.19 U.S. cents as of 8:15 a.m. in London, the steepest slide among 31 major counterparts. It had soared 48 percent over the four years ended Dec. 31, the biggest gain.
Analysts forecast it will trade at 96 cents by year-end, down from a prediction of $1.03 on April 30, according to data compiled by Bloomberg. It will end 2014 at 94 cents.
The pessimism has been driven by domestic data suggesting weaker demand, and comments from the central bank signaling the key rate can go lower even after it was cut to a record 2.75 percent on May 7. Swaps traders are betting on a 57 percent chance the rate will be 2.5 percent or less in August, according to data compiled by Bloomberg.
Royal Bank of Canada forecast last week the RBA will cut next month and lower the benchmark to 2.25 percent by year-end, as core inflation slows toward the bottom of the central bank’s target range of 2 to 3 percent.
Australia’s economy expanded at the slowest annual pace in almost two years in the first quarter as manufacturers and builders detracted from growth. The 2.5 percent growth missed economists’ median forecast for a 2.7 percent gain.
Estimates for China are also being trimmed with economists projecting a 7.8 percent expansion this year, down from 8.1 percent at the start of 2013.
“We understand the near-term slowdown, we understand the pressures in China,” said Fuss. On “the commodity demand and price situation we’re not as bearish there three, four, five years from now. That’s a fundamental difference in our outlook.”
The Australian government is focused on running a balanced budget and “very importantly” funds its retirement system, taking away the biggest liability that a lot of nations have, he said. The Aussie will also benefit from being identified as a widely held reserve currency by the International Monetary Fund, he said.
Versus the U.S. dollar “with a lot of bumps along the way, big, big bumps, certainly positive there,” Fuss said. “Three years from now is $1.05 possible? Yes, as a matter of fact we happen to think it’s not only possible, it’s likely.”
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