Goldman Seeks Sydney Beachhead as Aussie Depreciates: Currencies
Australia’s dollar has tumbled 15 percent from its high last year and strategists forecast more pain ahead. For Goldman Sachs Group Inc., it’s the perfect time to develop Sydney as a hub for trading local-currency assets.
Australia’s stable AAA credit rating makes it a haven and encourages sovereign-wealth funds to allocate more money there, said Simon Rothery, the chief executive officer of Goldman Sachs’s operations in the country and neighboring New Zealand. The New York-based firm moved its Australian credit derivatives business from Hong Kong to Sydney last month after bringing over bond and swaps trading last year, Rothery said.
“The Aussie dollar is an ever more important part of sovereign-wealth funds, central banks and global accounts,” Rothery said in a Feb. 27 interview in Sydney. “Everybody wants to play the China story, but you can’t get exposure directly so people gain access through Australia.”
In a sign of Australia’s rising prominence, the International Monetary Fund began breaking out central banks’ holdings of the local dollar at the end of 2012. Before that, it was lumped together in the organization’s “other currencies” category. Offshore investors boosted their holdings of the country’s government bonds -- the highest-yielding top-rated sovereign securities -- by A$28 billion ($25 billion) in 2013, to a record A$217.4 billion.
Goldman Sachs is in talks to hire about 10 people as it seeks to expand Australian businesses from trading to capital markets, Rothery said. Australian fixed-income trading is the firm’s biggest growth area, at a time when regulation is forcing some competitors to dial back.
Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc are among firms that have pulled back from Australian debt markets after losses during the global credit crisis spurred increasing regulation.
Australia’s dollar soared after the financial crisis, rising to a record $1.1081 in July 2011 from as low as 60.09 U.S. cents in 2008, as investors were drawn to the nation’s strong fiscal position. Its debt was about 29 percent of gross domestic product last year, compared with 106 percent for the U.S., according to data compiled by the IMF.
Sentiment has since turned on the Aussie as the central bank cut interest rates to a record to spur the economy with a mining boom fading. Australia’s dollar fell to 86.60 U.S. cents on Jan. 24, the lowest level since July 2010, and was at 90.46 as of 9:34 a.m. in London.
The Aussie declined today against 14 of 16 major counterparts after iron-ore prices dropped last week and data released over the weekend showed China’s exports slid by the most since 2009. It has weakened in the past year against all but the South African rand and Brazil’s real among its major peers, as tracked by Bloomberg.
Even with the declines, the Aussie accounted for 1.7 percent of reported global central banks’ foreign-exchange reserves in the third quarter, up from 1.5 percent in 2012, according to the Washington-based IMF.
Daily average trading in the Australian dollar across spot transactions, forwards and swaps was $462 billion in April last year, more than double the $205 billion in 2007, according to the Bank for International Settlements in Basel, Switzerland. The currency accounted for 8.6 percent of global foreign-exchange trading in 2013, up from 6.6 percent six years earlier.
Australia attracted inflows during the turmoil in emerging markets earlier this year, Rothery said. That helped the local dollar gain 1.5 percent since Dec. 31, bucking a 2.3 percent dip in an index of seven commodity-backed currencies as the U.S. Federal Reserve reduced its stimulus program and manufacturing slowed in China, the biggest consumer of raw materials.
“Central banks want exposure to AAA rated Australian-dollar bonds and the currency provides an opportunity,” Richard Grace, the Sydney-based chief currency and rates strategist at Commonwealth Bank of Australia, said in a March 6 interview. After its declines, “the currency provides a significant discount”, he said, “and that’s consistent with our central bank customers -- they’re still net buying.”
Australian authorities have deliberately talked down the local dollar to make exports more competitive and shield the economy from the end of a boom in mining investment. The Reserve Bank of Australia cut its benchmark interest rate twice last year, to 2.5 percent, from as high as 7.25 percent in 2008, before the global financial crisis took hold.
The Australian dollar will tumble about 4 percent to 87 U.S. cents by June 30 and to 86 by year-end, based on the median estimate of more than 40 strategists surveyed by Bloomberg.
RBA Governor Glenn Stevens has signaled the need for a weaker currency, telling lawmakers last week the Aussie “in the 90s or over” was too strong. He also said there’s no need to cut rates further “at this point in time,” citing improvements in the housing industry.
There are signs Australia’s efforts to rebalance the economy away from a dependence on commodities are bearing fruit. GDP grew 0.8 percent in the fourth quarter from the previous three months, exceeding the 0.7 percent gain forecast in a Bloomberg survey. Building approvals and retail spending rose.
BNP Paribas Investment Partners Japan Ltd. in Tokyo bought Australian dollars last month after the RBA dropped its easing bias, according to Naruki Nakamura, the money manager’s head of fixed income.
“If the currency stays as it is, it’s quite a good investment,” Nakamura said by phone March 7. “I’m enjoying the carry,” he said, referring to the returns offered by higher-yielding fixed-income assets.
Australia is one of just 10 nations with the highest credit ratings from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. Other members of this exclusive club include Canada, Germany and three of the Scandinavian countries though not, since 2011, the U.S.
Even with last year’s rate cuts, Australia’s government bonds offer an average 2.16 percentage-point yield advantage over other sovereign debt with the top credit grade from all three major ratings companies, up from 1.51 percentage points in June. Debt auctions in February attracted bids for 4.7 times the A$6.4 billion of bonds sold by Australia.
Deutsche Bank AG, which also uses Sydney as a hub for its Aussie fixed-income business, said last month in a report that the local dollar may slide to the mid-60s U.S. cents by the end of 2015 as the RBA keeps rates on hold and the Fed starts raising borrowing costs.
Goldman Sachs is less bearish. The Aussie probably won’t fall that low because it has cemented its position among reserve managers and other offshore investors, Rothery said.
“There’s been a structural shift in the region and the Aussie needs to be much more broadly held than it has been previously,” he said. “Equilibrium over the next three years is probably 75 cents to 90 cents.”
To contact the reporter on this story: Candice Zachariahs in Sydney at firstname.lastname@example.org