Aussie Rally Hits Wall of Skepticism Among Funds in Tokyo, Seoul

  • Currency is down about 12% in 2015 as commodities prices fall
  • Morgan Stanley bets Aussie will decline against Japanese yen

Bond investors in Tokyo and Seoul say they aren’t buying into the Australian dollar’s rally from a six-year low.

Sumitomo Mitsui Trust Asset Management and Mizuho Asset Management in Tokyo along with Samsung Asset Management in Seoul, say slowing Chinese demand for Australia’s commodities is a reason to stay away. The funds, which together manage more than $200 billion, also say the currency is overvalued. It will fall about 4 percent in 2016, based on a Bloomberg survey of economists.

The Aussie has rallied 2.3 percent against the greenback in this quarter, the most among 16 major currencies after the New Zealand dollar. Reserve Bank Governor Glenn Stevens opted against cutting rates on Dec. 1, and government data last week showed jobs are surging. The reluctance among bond investors to buy highlights concern that slowing demand from China for Australia’s commodities will overshadow whatever happens in the local economy.

“The Australian dollar is moving up, but I think it’s overvalued,” said Hideaki Kuriki, a bond investor at Sumitomo Mitsui Trust in Tokyo, which oversees $54.1 billion. “The Australian economy is steady but not strong because of declining mining investment.”

Return for 4Q 2015 is to Dec. 11 in Sydney

The Aussie traded at 72.44 U.S. cents as of 5 p.m. in Sydney on Dec. 11, rising from the low of 68.96 set in September. Even after a rally this quarter, the currency is still down more than 11 percent in 2015.

Morgan Stanley is betting Australia’s dollar will fall against the yen in its “strategic portfolio,” analysts at the company, led by London-based Hans Redeker wrote in a report Dec. 10. Whatever happens to the currency affects the returns for overseas investors who hold 64 percent of the nation’s debt.

Samsung Asset, South Korea’s biggest private money manager, is staying away, according to Wontark Doh, the head of overseas fixed-income investment. “We have no position in Australia,” he said. “The Australian dollar is affected by Chinese growth, and there’s concern about Chinese fundamentals. It’s not time to invest in Australian bonds.”

Slowing growth in China, the biggest buyer of Australian exports, sent the Aussie dollar down almost 14 percent in the first three quarters. Investment in Australia’s mining industry has dropped 39 percent from its high in 2013, the steepest decline since the 1990s, based on government data. Iron ore, Australia’s biggest export, fell below $40 a dry ton last week, dropping 46 percent this year.

Not Over

Goldman Sachs Asset Management says almost everyone who wants to sell the currency based on its link to the commodity has already done so. The Aussie’s rally against the greenback probably isn’t over, according to Philip Moffitt, the fund manager’s Sydney-based head of fixed income for Asia and the Pacific.

The RBA’s Stevens noted improvement in business conditions and employment when he decided against trimming interest rates at the start of the month. Australian had its biggest two-month jobs gain in October and November in almost 28 years, government data showed last week.

Mizuho Asset in Tokyo will probably undo its bets on the Australian dollar, said Yusuke Ito, a senior investor at the company in Tokyo.

“We overweighted the Aussie dollar a few months ago,” Ito said. “That’s not because we are positive about the outlook for the Australian economy, but only because the Aussie dollar collapsed. We thought the Aussie dollar was oversold. Probably in the near future we will change the position from overweight to neutral.”

Before it's here, it's on the Bloomberg Terminal.