A rally in the Australian dollar is taking the sting out of losses in the nation’s bonds for global investors, and 30-year market veteran Toshifumi Sugimoto sees further gains.
The country’s sovereign debt generated a loss of 1% over the past month, among the world’s worst. A surge in the Australian dollar means it has gained 4% in US currency terms, behind only Greece and Portugal among 26 debt markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.
Improvement in the local economy has led investors to scale back bets on Reserve Bank of Australia easing even as policy makers in Europe and Japan pursue negative-rate policies.
That’s helped drive demand for the Aussie as investors hunt for yield, with 10-year notes paying 2.57% on Thursday, versus 1.91% in the US and minus 0.05% in Japan. The Federal Reserve signalled on Wednesday it will probably carry out two interest-rate increases this year. “The Australian dollar will get strong because Australia has a high yield,” said Sugimoto, the chief investment officer at Capital Asset Management in Tokyo. “I’m looking at a weak yen and a strong US dollar this year because the Fed may raise interest rates, but Japan’s interest rate is low.
There will be more purchases by Japanese investors.”
The Aussie has risen against its US counterpart and fallen against the yen this year as a flight to quality in the global financial markets sent investors to the perceived safety of Japan’s currency.
The trend is running its course, and interest rates will emerge as the main force driving currencies, Sugimoto said. The Australian dollar will rise about 6% to 90 yen by year-end, he said.
Traders are increasingly betting RBA chief Glenn Stevens will hold the nation’s benchmark rate at 2% as growth quickens. Yields suggest traders expect 19 basis points of interest-rate reductions in the coming six months. It was 28 basis points as recently as March 9. Australia’s economy expanded 3% in the fourth quarter from the year-earlier period, the government reported this month, the fastest pace since the start of 2014.
Central bankers in Europe and Japan are undertaking unprecedented monetary easing to revive their economies. The ECB surprised investors this month with the extent of a new stimulus package. In February, the Bank of Japan unexpectedly added negative rates to its quantitative-easing programme.
The Aussie is vulnerable as economic growth slows in China, said Hans Goetti, the chief strategist for the Middle East and Asia at Banque Internationale à Luxembourg, which has $36.4bn under management.
The two are linked because China is the biggest customer for Australia’s commodity exports, Goetti said in an interview in Singapore. A bet against the Aussie, a so-called short, will benefit as growth in the Asian nation slows, he said.
“The concern is China,” Goetti said. “If you want to short China, just short the Australian dollar.”