Aussie Jump Is False Dawn for Mizuho on China: Australia Credit

Japanese investors overseeing $47 billion say the Aussie’s strongest rally in five months is a false dawn, as a slowdown in China’s factories overshadows signs of strength in the South Pacific economy.

Mizuho Asset Management Co., which supervises $39.4 billion, predicts the currency will fall to 80 U.S. cents in a year after surging as high as 89.99 on Feb. 7. Tokyo-based BNP Paribas Investment Partners Japan, which manages the equivalent of $7.6 billion, is waiting for lower levels before buying the nation’s debt, even after Reserve Bank of Australia Governor Glenn Stevens on Feb. 4 signaled an end to jawboning that helped drive the local dollar to a 3 1/2-year low in January.

“The currency is going to weaken,” said Yusuke Ito, a Tokyo-based portfolio manager at Mizuho Asset. “The driver of growth for China is changing from infrastructure investment to service-oriented growth. During that process, commodity prices like iron ore or coal are going to come down, and that’s going to hurt Australian exports.”

The Aussie dollar lost 13 percent in the past year, the most among 10 major developed currencies, as Japanese investors dumped record amounts of the nation’s debt. The currency’s slide has been welcomed by the RBA as the economy slows with the waning of a record mining boom. Data this week may show Chinese import and export growth slowed, after signs of weaker manufacturing in Asia’s largest economy helped spark a global rout in emerging markets.

Stevens left borrowing costs at a record-low 2.5 percent last week and said a period of rate stability would be “the most prudent course.”

Mystery Meat

The pace of growth in China is among the biggest questions in developing nations, according to Bill Gross, who oversees the world’s biggest bond fund at Pacific Investment Management Co. The world’s second-largest economy is the “mystery meat of emerging-market countries,” he said in a Bloomberg Television interview last week.

Investors have withdrawn $1.6 trillion from global equity markets this year, data compiled by Bloomberg show. The Argentine peso, which extended its slump since Dec. 31 to 17 percent after its devaluation last month, leads declines among 24 emerging currencies that Bloomberg tracks.

Australia’s currency lost 0.1 percent to 89.53 U.S. cents as of 11:37 a.m. in Sydney. It climbed 2.3 percent last week, the biggest five-day gain since the period ended Sept. 6. The Aussie slid 14 percent in 2013, the steepest drop in five years.

Goldman Sachs

Goldman Sachs Group Inc. said the Aussie may extend its slump as capital flows from reserve managers weaken and the commodities boom fades.

“Could we see in two years time something like 70 or high 60s handle?” Thomas Stolper, the bank’s chief currency strategist, said at a Feb. 7 conference in Sydney. “Absolutely possible in our view. Not necessarily in a straight line, not necessarily a sharp move, but that’s just the normal rebalancing that you would expect in this situation where you go into a big cyclical change of the magnitude happening at the moment in the commodities sector.”

The Aussie pared its losses this year after Stevens said on Feb. 4 he expects growth will strengthen, spurred by the lower exchange rate and continued low interest rates. An auction the following day of sovereign bonds due April 2025 attracted bids for 5.06 times the A$800 million ($716 million) on offer, the strongest demand since November, according to data from the government funding arm.

Buy Trigger

“It was a trigger for offshore investors to buy,” Damien McColough, the Sydney-based head of Australian rates strategy at Westpac Banking Corp., said of the shift in policy maker’s currency stance. “The RBA has underpinned the view that they’re not going to do anything for a substantial period of time. That being the case, you can pick up yield and run down the yield curve in Australia without the central bank damaging you.”

Traders now see policy makers adding 15 basis points to the cash rate in the next 12 months, a Credit Suisse Group AG index shows. Australia’s three-year yield, among the most sensitive to interest-rate expectations, rose from a four-month low of 2.78 percent on Feb. 4 to 2.98 percent today. The 10-year yield touched 4.18 percent, the highest since Jan. 23, after rising 15 basis points last week.

Japanese investors sold a net 254.7 billion yen ($2.5 billion) of Australian government bonds last year, the finance ministry reported today, the biggest annual decline in data starting in 2005. They offloaded a net 6.7 billion yen of debt in December, the first sales in seven months, the figures show.

Sold Bonds

Hideaki Kuriki, a bond investor in Tokyo at Sumitomo Mitsui Trust Asset Management Co., which oversees the equivalent of $41.4 billion, said he sold Australian 10-year bonds in January when the yield dropped to about 4 percent. The figure will be at 4 percent to 4.4 percent for the first quarter, Kuriki said. The median forecast of economists surveyed by Bloomberg is for 4.25 percent by March.

Kuriki said he’s not taking a view on the currency after last week’s policy decision and statement. “I don’t know if this is concrete or not,” he said.

Analysts see the Aussie falling to 85 cents by year-end, down from a median forecast of 88 cents as recently as Jan. 1. There’s a 66 percent chance the currency will reach that level by Dec. 31, according to options data compiled by Bloomberg.

Naruki Nakamura, head of fixed income at the BNP business in Tokyo, said Stevens’s statement wasn’t enough to prompt him to boost his Aussie assets as easing growth in China threatens the South Pacific nation’s exports. He may add to his holdings if the currency falls to the 3 1/2-year low of 86.60 cents reached on Jan. 24.

“We have a chance to get there,” Nakamura said of the Aussie. “The slowdown in China and several other emerging countries will be negative for commodity prices and the Australian economy.”

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