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.
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% benchmark rate is the highest among developed nations.
The Aussie has surged 50% 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% of the $6.1 trillion in allocated global reserves. China, the world’s biggest reserve holder, doesn’t report the data to the IMF.
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% 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% as of March 31, compared with 3.6% at the end of last year. Sunnerberg predicts the Australian dollar will rise over a two-year-plus time frame.