Smart Money Likes High-Yield Aussie’s Robust Economy: Currencies

The smart money shows no sign of losing confidence in the Australian dollar as analysts belatedly acknowledge the appeal of a high-yielding currency with a world-beating developed economy.

The trade-weighted index for the so-called Aussie reached its highest level since 1985 yesterday, spurring analysts to reverse course after cutting year-end forecasts for the currency. Australia’s dollar will likely trade at $1.02 by Dec. 31, up from estimates at the end of March of $1.01, according to the median of 42 forecasts compiled by Bloomberg. Rabobank NA, the currency’s most-accurate forecaster, boosted its outlook.

Buoyed by a record mining investment boom, Australia’s economy grew 3.6 percent in 2012, the fastest pace in five years and the best performance among the Group of 10 currency nations. While the government reported today that the unemployment rate rose to the highest level since November 2009, the nation will lead growth through 2015, expanding an average 2.9 percent, according to Bloomberg surveys of economists.

“The Australian dollar meets our criteria of a strong currency and we do believe it will be an important beneficiary of continued central-bank reserve diversification,” Jonathan Lewis, New York-based chief investment officer and a founder of Samson Capital Advisors LLC, which oversees about $7.3 billion, wrote in an e-mailed response to questions. “We believe this is a very long-term investment theme.”

Reserve Managers

Three-quarters of 60 central banks polled in February said they are investing in or may buy Australian dollars, Royal Bank of Scotland Group Plc said April 7.

Australia’s dollar rose for a fourth day, strengthening 0.2 percent to $1.0559 at 12:09 p.m. New York time after advancing to $1.0582, the most since Jan. 11. It has remained above $1 for a record nine-month stretch. The Reserve Bank of Australia’s trade-weighted index, which tracks the Aussie against the currencies of 21 nations that account for at least 90 percent of the country’s commerce, rose 0.4 to 79.90 yesterday, the most since February 1985.

Samson’s Strong Nations Currency Fund, which considers economic and financial positions, governance and law while making foreign-exchange investments, held 9.1 percent of its assets in the Australian dollar as of March 31, the largest share along with the Chilean peso among currencies outside of the U.S. dollar, according to its website.

AAA Rating

UBS Global Asset Management, overseeing about $630 billion worldwide, expects the Aussie to stay high as investors “just love” the yields it offers.

Australia is one of eight nations that hold stable AAA grades from all three main credit-rating companies. Its 10-year sovereign bond yields are 1.77 percentage points more than the average for the other seven countries.

With A$270 billion ($284 billion) in sovereign debt, Australia has the second-largest government bond market among stable AAAs. That compares with $11.6 trillion for the U.S., which Standard & Poor’s reduced to AA+ in 2011, and $9.2 trillion for Japan, graded AA- by S&P.

“We are seeing corporates, not just from Asia but from Europe, thinking: Where are we going to put our money?” Anne Anderson, head of Asia-Pacific fixed income for UBS Global Asset Management, said at the Bloomberg Australia Economic Summit yesterday. Clients in Europe “look at the yield and they cannot believe that our bond yields are so high,” she said.

Diversifying Reserves

The currency will trade in a range from 85 U.S. cents to $1.15, Anderson said, without specifying a time frame. The Aussie climbed as high as $1.1081 on July 27, 2011, the most since it was freely floated in 1983. The RBA’s 3 percent benchmark rate is the highest among developed nations.

The Aussie has surged 50 percent since the end of 2008 as unconventional easing by nations including the U.S. and Japan, and a debt crisis in Europe prompted investors to diversify away from the dollar, yen and euro.

The Federal Reserve and the Bank of Japan have pledged to purchase about $160 billion in bonds between them every month to spur growth, pursuing so-called quantitative easing that some investors speculate will debase their currencies.

Central banks for the first time used their reserves to buy about the same amount of currencies from Australia and Canada as U.S. dollars at the end of last year, according to International Monetary Fund data released March 29.

A category the IMF calls “other currencies,” which strategists say is dominated by the Aussie and Canadian dollars, rose to a record 6.1 percent of the $6.1 trillion in allocated global reserves. China, the world’s biggest reserve holder, doesn’t report the data to the IMF.

Aussie ‘Floor’

The IMF said in November it would consider separately identifying allocations to the Aussie and Canadian dollar in its Composition of Official Foreign-Exchange Reserves report. That would influence central bank decisions to invest in these currencies, 67 percent of those polled for the RBS Reserve Management Trends 2013 report said.

“Ongoing demand for AAA rated credit may put a floor under the Australian dollar,” said Darcie Sunnerberg, a vice president and sovereign analyst at Boston-based Loomis Sayles & Co., which has $186 billion in assets under management. “Overall, fundamentals would suggest a weaker Australian dollar in the short-term,” she said in an e-mailed response to questions.

The Loomis Sayles Bond Fund had an Australian-dollar exposure of 3.5 percent as of March 31, compared with 3.6 percent at the end of last year. Sunnerberg predicts the Australian dollar will rise over a two-year-plus time frame.

Rate Forecast

Barclays Plc and Credit Suisse Group AG are among forecasters saying the currency will drop below $1 this year as slowing mining investment damps growth. Gross domestic product will probably slow one percentage point to 2.6 percent this year, according to the median forecast of economists polled by Bloomberg News.

A National Australia Bank Ltd. business conditions gauge slumped to its weakest in almost four years, an April 9 report showed. The nation’s unemployment rate will rise to 5.75 percent this year, the bank said.

The jobless rate climbed to 5.6 percent in March, the highest since November 2009, a statistics bureau report showed today. The number of people employed fell by 36,100, almost five times more than economists forecast, the data showed.

To arrest the slowdown and support the economy as a record mining investment boom slows, the RBA will cut borrowing costs to a record low 2.75 percent in the third quarter, economists in a Bloomberg News survey estimate.

The RBA reduced rates by 1.75 percentage points since Nov. 1, 2011, to rebalance the economy away from mining and toward industries including construction and tourism.

‘Quality Place’

“There’s room to cut should that be necessary,” RBA Assistant Governor Christopher Kent said yesterday at the Bloomberg Summit.

Year-end forecasts for the Aussie range from Saxo Bank A/S’s 88 cents to $1.12 at Royal Bank of Canada, according to data compiled by Bloomberg.

“We’re hedged and we’ll stay that way until we see fundamentals change in a bigger way,” said Daniel Janis, a global fixed-income portfolio manager who helps oversee about $15.5 billion at Manulife Asset Management in Boston. “We like the quality of the government bonds because we don’t have to worry from a ratings standpoint, so it’s a quality place holder in our portfolio.”

Janis estimates the Aussie will trade in a range from parity to $1.06.

Offshore investors’ holdings of Australian sovereign debt swelled by A$23 billion to A$207 billion last year and foreign deposits in domestic banks rose to a record, official data show.

“The main theme is that China’s still got this diversification bid out there for the Australian dollar and that has limited declines in the currency above the parity level,” said Adrian Foster, the Hong Kong-based head of financial-markets research for Asia at Rabobank.

Rabobank, the most accurate firm at picking the Aussie over the past four quarters according to data compiled by Bloomberg, forecasts it will end the year at $1.06.

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