Central Bank Aussie Hunger Adds to RBA Dilemma: Australia Credit
Global monetary authorities’ enduring interest in the Aussie dollar is hindering efforts by Australia’s central bank to curb the currency’s strength.
Westpac Banking Corp., the country’s second-biggest bond underwriter, said the number of central banks it interacts with has tripled to about 60 over the past three years. Central banks bought more than a quarter of the 2033 Australian Commonwealth government bonds offered in a record sale last week, the country’s funding arm said Nov. 20.
Reserve Bank of Australia Governor Glenn Stevens said Nov. 21 that the search for higher yields and the nation’s AAA status has contributed to strength in the local dollar, adding he wouldn’t “eschew” currency intervention. South Africa’s central bank this month joined peers in saying it would add the currency to its reserves. Australian bonds have handed U.S. dollar-based investors a 12.6 percent loss this year, the second-worst performance among sovereign markets tracked by European Federation of Financial Analysts Societies and Bloomberg indexes.
“There is a perception of Australia being part of the reserve currencies or part of a core portfolio,” Michael Correa, global head of fixed income at Westpac, said in a Nov. 21 interview. “The central banks’ participation in ACGBs will be a long-term participation. I don’t see them going away.”
Central banks are also looking at investing in other top-rated Australian debt securities, including state-government notes, Correa said.
Stevens has said in recent months that the Aussie remains high and has sought to exert pressure on it by maintaining an easing bias, even as evidence mounts that record-low interest rates are stimulating housing and consumer sentiment. He is “open-minded” about the possibility of intervening in currency markets, he said during a speech last week to mark the thirtieth anniversary of exchange controls being scrapped.
The RBA’s cash target currently stands at 2.5 percent following 2.25 percentage points of cuts since November 2011. Economists are divided over whether the central bank has finished its cutting cycle and swaps traders are betting there is about a 75 percent chance the benchmark will be unchanged or higher by the middle of 2014.
While the Aussie dollar has dropped 12 percent this year, the International Monetary Fund said last week that it was still about 10 percent overvalued. The currency bought 91.81 U.S. cents as of 12 p.m. in Sydney, about 20 percent above its average since it was floated. It last week touched 91.44 cents, the lowest since September.
Documents released in February showed the RBA estimated that as many as 34 central banks held the Aussie dollar as part of their reserves. China, France, Germany, India, Slovakia and Slovenia were among those holding or possibly holding Australian dollars, according to the documents.
Australia’s bonds are the highest-yielding securities among major developed economies. The 10-year government bond yielded 4.30 percent. Similar-tenor U.S. Treasuries yielded 2.76 percent.
Record monetary stimulus in the U.S. has been a major factor pushing up the Aussie and the RBA would be hoping the Federal Reserve starts dialing back its extraordinary measures soon so it does not have to step in, said Gareth Berry, a Singapore-based currency strategist at UBS AG.
“The domestic situation in Australia is a factor for the exchange rate, but what matters more is what the Fed does, and how soon the Fed does it,” he said.
The prospect of such tapering has pushed up yields around the world. In local currency terms, Australian government bonds have handed investors a 1 percent loss so far this year, EFFAS indexes show.
Last week’s A$5.9 billion ($5.4 billion) bank-led sale of 2033 Australian government bonds attracted more than A$8.9 billion worth of bids and 27.7 percent of the notes were allocated to central bank buyers, according to the Australian Office of Financial Management. Offshore investors took 59.1 percent, the AOFM said.
The proportion of official foreign-exchange reserves held in Aussie dollars rose to 1.7 percent in the second quarter from 1.5 percent at the end of 2012, according to data from the IMF, which began reporting on holdings in the currency late last year, acknowledging increased demand for it among central banks.
“One of the long-term investment themes that is very important for currency investors is central bank diversification,” said Jonathan Lewis, the New York-based chief investment officer at Samson Capital Advisors LLC, which oversees more than $7 billion including the Strong Nations Currency Fund. “The Australian dollar is a good long-term hold,” he said in a Nov. 13 interview.
In addition to ordinary federal bonds, there is also an opportunity for foreign central banks to add holdings of state government debt, inflation-linked notes and asset-backed securities, Westpac’s Correa said.
Bonds from the country’s six states and two territories offered an average 45 basis points more than federal securities on Nov. 22, according to a Bank of America Merrill Lynch index. New South Wales, the biggest issuer with top credit grades from both Moody’s Investors Service and Standard & Poor’s, has A$60.3 billion of bonds outstanding, while Victoria has a burden of A$37.7 billion. The lower-rated states and territories have combined borrowings of A$130.8 billion.
In his Nov. 21 speech, Stevens said that flows from official reserve managers into Australian dollars “have surely been important at times, though not necessarily lately. The available data suggest that foreign holdings of Australian government debt stopped rising in the middle of last year.”
About 69 percent of federal securities outstanding at the end of June were held by investors outside of Australia, according to government data compiled by Bloomberg. The proportion is below the peak of 76.1 percent reached in June 2012.
“Unprecedented offshore demand for Aussie bonds over the last three or even four years, although that may have faded a little bit in recent times, it’s still present and it is a supporting factor for the currency,” said UBS’s Berry. “What we’re witnessing is a multi-year diversification trend amongst the central banking community. This is likely to be with us for years to come.”
To contact the reporter on this story: Benjamin Purvis in Sydney at firstname.lastname@example.org